Why rising demand for housing often leads to higher prices rather than more homes
When new jobs arrive in a city, housing demand surges. This video explores why this influx often drives prices up instead of increasing the number of available homes, focusing on the economic concept of supply elasticity.
Economist Alex Tabarrok examines how the relationship between price and quantity in the housing market is determined by elasticity. In a standard supply and demand model, an increase in demand should ideally lead to a new equilibrium with more housing units sold. However, the outcome depends on how responsive supply is to price changes.
In cities like San Francisco, natural and legal constraints make housing supply inelastic, meaning price increases significantly while the quantity of new homes remains relatively stagnant. Conversely, cities such as Auckland, New Zealand, have implemented liberalized markets to create more elastic supply, demonstrating that affordability is closely linked to the ability to expand housing stock.
Source: Elasticity of Supply: Why Housing is Unaffordable
