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Regional variation in the elasticity of supply of housing, and its determinants: The case of a small sparsely populated country

Author

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  • Elias Oikarinen
  • Eero Valtonen
Abstract
The long-term price elasticity of supply of housing is a key factor determining the growth rates of housing prices and housing supply as the city grows. Therefore, the housing supply elasticity has considerable influence on the competitiveness of the region and on the growth potentials of the area. Previous empirical investigations provide evidence of substantial regional variation in the supply elasticity of housing within the U.S. The literature further shows that the supply elasticity and its variation across cities are significantly influenced not only by regulatory supply constraints, but also by the city level population, population density, and geographic constraints. This paper studies empirically if these findings apply to a country that is notably different from the U.S. with respect to its size, population density, typical city size, geographic and cultural coherence, and regulatory constraints, i.e., Finland. Apparently, this is the first study to estimate the supply elasticities directly based on the level of housing stock and the Johansen Maximum Likelihood methodology. Our findings are largely in line with those reported for the U.S. Based on quarterly data for the period 1987-2011, the analysis shows substantial regional variation in the long-term supply elasticity across Finnish cities. To examine the factors behind the observed regional differences, we construct an index that aims to measure the city level regulatory and geographic constraints for housing supply. The city size, zoning policies, and geographic constraints are found to be the most significant factors causing regional elasticity diversity. Together, these factors account for 80% of the regional elasticity variations. While more flexible regulation can increase the supply elasticity ? and a general policy recommendation is therefore that regional administrations should strive to decrease the regulatory constraints on housing supply to increase the growth potentials of the area ? the results imply that the opportunities of regulatory policies to affect the elasticity are limited even in a sparsely populated country with small cities and abundant reserve of vacant developable land.

Suggested Citation

  • Elias Oikarinen & Eero Valtonen, 2014. "Regional variation in the elasticity of supply of housing, and its determinants: The case of a small sparsely populated country," ERSA conference papers ersa14p1261, European Regional Science Association.
    • Handle: RePEc:wiw:wiwrsa:ersa14p1261
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    2. Guedes, Ricardo & Iachan, Felipe S. & Sant’Anna, Marcelo, 2023. "Housing supply in the presence of informality," Regional Science and Urban Economics, Elsevier, vol. 99(C).
    3. Oskari Harjunen & Mika Kortelainen & Tuukka Saarimaa, 2018. "Best Education Money Can Buy? Capitalization of School Quality in Finland," CESifo Economic Studies, CESifo Group, vol. 64(2), pages 150-175.
    4. Feng Yuan & Weiye Xiao & Yehua Dennis Wei, 2023. "Heterogeneous mechanisms of urban land price in China: a perspective of natural restrictions and strategic supply," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-14, December.
    5. Heidi Artigue & Jeffrey Brinkman & Svyatoslav Karnasevych, 2022. "The Push of Big City Prices and the Pull of Small Town Amenities," Working Papers 22-41, Federal Reserve Bank of Philadelphia.
    6. Korkeamäki, Timo & Liljeblom, Eva & Pasternack, Daniel, 2017. "CEO power and matching leverage preferences," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 19-30.
    7. Elias Oikarinen & Janne Engblom, 2016. "Differences in housing price dynamics across cities: A comparison of different panel model specifications," Urban Studies, Urban Studies Journal Limited, vol. 53(11), pages 2312-2329, August.
    8. Sviatlana Engerstam & Abukar Warsame & Mats Wilhelmsson, 2023. "Exploring the Effects of Municipal Land and Building Policies on Apartment Size in New Residential Construction in Sweden," JRFM, MDPI, vol. 16(4), pages 1-25, April.
    9. Geok Peng Yeap & Hooi Hooi Lean, 2020. "Supply elasticity of new housing supply in Malaysia: an analysis across housing sub-markets," Economics Bulletin, AccessEcon, vol. 40(1), pages 807-820.
    10. Eerola, Essi & Saarimaa, Tuukka, 2018. "Delivering affordable housing and neighborhood quality: A comparison of place- and tenant-based programs," Journal of Housing Economics, Elsevier, vol. 42(C), pages 44-54.
    11. Lozano Navarro, Francisco-Javier, 2015. "Elasticidad precio de la oferta inmobiliaria en el Gran Santiago [Housing supply elasticity in Greater Santiago]," MPRA Paper 65012, University Library of Munich, Germany.

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    More about this item

    Keywords

    housing; supply; elasticity; regions;
    All these keywords.

    JEL classification:

    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • R52 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Land Use and Other Regulations

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