Housing supply and prices: revising the theory

Abstract

House-building has been very intense in Spain throughout the last 15 years. It has generated an expansion in the residential stock that has been explained as the result of some demand forces playing at the same time and boosting residential market mechanisms during this period. However, in other European countries with similar tensions, the supply side has grown at a considerably lower rate than in Spain, even though residential prices have increased at a similar pace. The behaviour of the factors determining the supply has not been studied deeply. This paper evaluates the sensitivity of house building in Spain between 1987 and 2004 with the aim of explaining its influence on price behaviour. Some different new-supply elasticity measures have been used by the literature. We calculate them for the whole Spanish housing supply using two different techniques, regressions methods on a base of dynamic panel data analysis and error correction models. The results show a supply elasticity of 0.86 for the whole Spanish new housing market. It also contrast that the value for the new supply elasticity change on time and space, so depend of the considered period, being lower during the first part of the 1990’s , and also the geographical territory analysed, being higher in those which housing markets are more active. Estimations also allow us to classify the markets between those where housing supply responds to the market-signals and those who don’t showing such type of market restrictions or interventions.