A Revisit of Supply Elasticity and Within-city Heterogeneity of Housing Price Movements

Abstract

While supply elasticity can explain why housing prices appreciate by different amounts across cities, it may play a lesser role in smaller geographic units, such as neighbourhoods within a city. This is because of location substitution: a city cannot be easily substituted by another city, but neighbourhoods of the same city can be close substitutes. This paper revisits the question of whether supply elasticity can differentiate housing price appreciation rates within a city by carefully accounting for substitution effects at the neighbourhood level. From a Hong Kong housing boom (2003—2018), we have found that the impact of supply elasticity on another neighbourhood on average is about one-tenth of the impact on its own neighbourhood. It rejects the notion of perfect substitution, under which this magnitude difference should not have been identified. The contribution of this paper is threefold: 1) It clarifies the theoretical relationship between supply elasticity and substitution in shaping housing price movements. 2) It proposes two novel ways to account for neighbourhoods’ substitution using the spatial spillover of land availability and price co-movement. 3) It delivers a clear answer that supply elasticity can shape the housing price movements within a city.