places with more elastic housing supply have fewer and shorter bubbles, with smaller price increases. However, the welfare consequences of bubbles may actually be higher in more elastic places because those places will overbuild more in response to a bubble. ... the price run-ups of the 1980s were almost exclusively experienced in cities where housing supply is more inelastic. More elastic places had slightly larger increases in building during that period. Over the past five years, a modest number of more elastic places also experienced large price booms, but as the model suggests, these booms seem to have been quite short. Prices are already moving back towards construction costs in those areas.
Friday, September 5, 2008
Housing bubbles are smaller where supply is elastic
The latest from Ed Glaeser:
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Um, Ed, isn't this just ECON 101? Equilibrium quantity changes more when supply is more elastic. No doubt, the negative consequences are greater when builders are fooled into building more when they shouldn't. The problem is identifying price increases due to bubbles from those due to ordinary shifts in demand. If the builders are not fooled by high prices, then areas with more elastic supply more easily adjust to the shift in demand and are consequently better off. It takes a bit of hubris to claim to know when these price changes do not reflect the real opportunity costs.
ReplyDeleteInstead of adjusting the supply to meet demand, what if the government could adjust the demand to meet supply? (i.e. population control)
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