Critical Finance Review > Vol 5 > Issue 2

Supply Constraints Are Not Valid Instrumental Variables for Home Prices Because They Are Correlated With Many Demand Factors

Thomas Davidoff, Sauder School of Business, UBC, Canada, tom.davidoff@gmail.com
 
Suggested Citation
Thomas Davidoff (2016), "Supply Constraints Are Not Valid Instrumental Variables for Home Prices Because They Are Correlated With Many Demand Factors", Critical Finance Review: Vol. 5: No. 2, pp 177-206. http://dx.doi.org/10.1561/104.00000037

Published: 21 Dec 2016
© 2016 T. Davidoff
 
Subjects
 
Keywords
R21G32J31
Housing DemandFinancing PolicyWage level and structure
 

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In this article:
1. Introduction
2. Supply Constraints, Quantity Growth, and Demand
3. Empirical Analysis of Supply Constraints and Productivity, Price, and Quantity Growth
4. Interactive Instrumental Variables
5. Conclusions
Appendix: Regressions of unit growth and price growth and volatility on other proxies for supply constraints
References

Abstract

Economists sometimes assume that strictly regulated housing markets near mountains and oceans are expensive because they are costly places to build, not because they are nice places with productive firms and workers. U.S. data show this convenient assumption to be false. Housing supply has grown more in supply-constrained markets than elsewhere over recent decades, indicating constraints are correlated with demand growth. Supply constraints are highly correlated with productivity proxies such as historical education levels, immigration, and national employment growth in locally prevalent industries. The correlation between constraints and productivity growth invalidates common uses of constraints as part of instrumental variables for home prices. The relationship between supply constraints and price volatility is much weaker after accounting for observable demand factors.

DOI:10.1561/104.00000037

Replication Data | 104.00000037_supp.zip (ZIP).

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DOI: 10.1561/104.00000037_supp