Evaluating Housing Supply Elasticity in Inter-city Spatial Equilibrium: Evidence from Chinese Urban Growth

We examine the influences of urban redevelopment costs and land-use allocation efficiency and equity on the elasticity of housing development density with respect to urban demand shocks in the context of China’s urban growth from 1998 to 2004. We do so in an inter-city spatial equilibrium framework, where demand shocks are capitalized in urban land rent growth, which influences urban population growth through housing supply elasticity. Importantly, this approach distinguishes the supply elasticity revealed by the population growth effect of land rent shocks from the price effect of urban population shocks, which reveals the effect of agglomeration economies, a distinction not widely recognized in the extant housing supply studies. We further control for supply shifts due to urban land-use growth and increased housing absorption by existing urban residents due to income growth, in accounting the contribution of the demand shocks and housing density elasticity to urban growth, and find a number of institutional factors, including local government efficiency, privatization of state-owned enterprises, and income equality, to elevate the density elasticity, as predicted by their impact on development cost and land-use allocation efficiency and equity. Moreover, the variation in the density elasticity appears as important in explaining cross-city population growth as that in urban land-use growth.