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A new paper from a trio of economists showed that rising housing prices are primarily tied to rising incomes, not supply levels.
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The paper raises questions about economists’ conclusions that limited housing supplies are behind stubbornly high housing prices, instead of pointing to higher wages.
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The economists argued that proposed changes in zoning and other housing regulations may not reduce housing prices as much as expected.
House prices have been steadily climbing and economists often point to a common culprit: low supply. Too few houses available to buy means that sellers can ask for higher prices.
But three economists have a different conclusion on what may be driving home prices higher: rising wages.
The trio argues in a new paper released by the Federal Reserve Bank of San Francisco that areas with higher income growth will generally have higher housing prices, with supply levels having less influence on price movements than generally believed.
The conclusion could have policy impacts, with the authors raising questions about the need for regulatory and zoning changes that some have argued are necessary to boost the housing market.
“Contrary to prevailing beliefs and influential policy narratives, our empirical results consistently demonstrate that higher income growth predicts similar growth in house prices, housing quantities, population, and living space per person across more and less housing constrained cities,” wrote Schuyler Louie, a University of California at Irvine economist, and San Francisco Fed economists John Mondragon and Johannes Wieland.
The paper looked at housing supply elasticity, which measures how much the supply of housing will change when housing prices change. Housing supply elasticity varies across cities and regions, with local housing regulations and geographical constraints having an impact on how much housing supply can be added when housing prices move higher.
The economists’ research showed that a city or region that has higher income increases will not only see greater growth in home prices, but also increases in housing quantities, population, and rooms per person. The reaction to higher incomes occurs regardless of the city’s housing supply constraints, the report showed.
“These results challenge the prevailing view of local housing and labor markets and suggest that easing housing supply constraints may not yield the anticipated improvements in housing affordability,” the paper said.
