Housing Supply and Price Adjustment

We analyse two inter-related features of regional housing markets: determinants of new housing supply, and the impact of supply responsiveness on price dynamics. We demonstrate that a suitably specified q-theory model (including residential land values as well as construction costs) explains intended housing starts. Few prior studies have found significant land price effects, due either to their omission or (possibly) to incorrect data definition (use of agricultural rather than residential land values). We examine the interaction of supply responsiveness and price adjustment following demand shocks, using a new panel dataset covering 53 quarters across 73 regions of New Zealand. Regions with high supply responsiveness have relatively small price spikes following demand shocks, consistent with a rational response that limits house price jumps in regions with strong supply responses.

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