Housing Market Behavior with Restrictive Land Supply

This thesis examines, both theoretically and empirically, the effects of land supply restriction on housing price and housing production. The analysis is conducted in the context of a closed city, where any increase in population must be accommodated within the market. The theoretical part of the analysis extends the urban spatial theory by including natural and contrived land supply restrictions in a range of monocentric models. It reveals that a restriction on land supply increases housing prices by suppressing household space consumption rather than by reducing housing production. In equilibrium, housing densities and prices will be sufficiently high to ensure that enough housing units will be produced to accommodate the population. The analysis also identifies for the first time that the impact on the housing market of a temporary restriction on land use can be very different from that of a permanent reduction in land supply. Incorporating the insights yielded from theoretical analysis, an improved stockflow model is developed in which land supply is explicitly included in housing price and production functions. Empirical tests based on data from Hong Kong have confirmed the above relations between land and housing. Specifically, restrictive land supply is found to raise expected price appreciation but have no direct effect on the production of new housing units. The analysis also shows that the market response to changes in land supply is rational and can be understood in the framework of the perfect-foresight model of urban growth. Given the planned change of government in Hong Kong in 1997, this study provides a background to evaluate and predict the likely consequences of changes in land policy. Thesis Supervisor: William C. Wheaton Title: Professor of Economics and Urban Studies