Construction Elasticities and Land Availability: A Two-stage Least-squares Model of Housing Supply Using the Variable Elasticity Approach

Gwilym Pryce

Urban Studies, 1999, vol. 36, issue 13, 2283-2304

Abstract: This paper uses data at English local authority district level to construct a simultaneous equation model of housing construction that compares elasticities of supply between two cross-sectional periods—1988 (boom) and 1992 (slump) — using the variable elasticity approach. Econometric issues raised by earlier supply studies are discussed and tested for. The paper also discusses the rationale for, and tests the existence of, a backward-bending supply relationship, and finds that supply is concave in both periods, and 'bends backwards' during the boom. Evidence of a structural break between boom and bust is found, producing average price elasticities of supply noticeably smaller in the boom (0.58) than in the slump (1.03), with considerable variation across disticts. Land supply elasticities are found to be more stable over time, and marginally greater in the boom (0.75) than in the slump (0.71). The paper also calculates second partial derivatives based on the whole demand-supply system to obtain estimates of the impact of land release on new house prices.

Date: 1999
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Persistent link: https://EconPapers.repec.org/RePEc:sae:urbstu:v:36:y:1999:i:13:p:2283-2304

DOI: 10.1080/0042098992421

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