Housing supply elasticity and growth: evidence from Italian cities

This paper examines the impact of housing supply elasticity on urban development. Using data for a sample of roughly one hundred Italian main cities observed over 40years, we first estimate housing supply elasticities at the city level, measured as the correlation between the changes in the housing stock and in the house prices. Second, we show that differences in the elasticity of housing supply may determine the extent to which a demand shock translates into more intense employment growth or more expensive houses. To address endogeneity of housing supply elasticity, we exploit a synthetic measure of physical constraints to residential development as instrumental variable. We find that an exogenous increase in labor demand determines a rise of employment and house prices; however, in cities with a less elastic housing supply, the impact on economic growth is significantly lessened while the effects on house prices are larger.