Arrested Development: Theory and Evidence of Supply‐Side Speculation in the Housing Market

Arrested Development: Theory and Evidence of Supply‐Side Speculation in the Housing Market

  • CHARLES G. NATHANSON
  • ERIC ZWICK

Article first published online: 29th August 2018 DOI: 10.1111/jofi.12719

Abstract


This paper studies the role of disagreement in amplifying housing cycles. Speculation is easier in the land market than in the housing market due to frictions that make renting less efficient than owner‐occupancy. As a result, undeveloped land facilitates construction and intensifies the speculation that causes booms and busts in house prices. This observation challenges the standard intuition that in cities where construction is easier, house price booms are smaller. It also can explain why the largest house price booms in the U.S. between 2000 and 2006 occurred in areas with elastic housing supply.

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