Within-city heterogeneity in the housing market and neighborhoods' supply constraints : an investigation from Hong Kong

Abstract

Housing prices go up and down in cycles. Across markets, prices tend to move in the same direction but not necessarily by the same amount. It is known as the heterogeneity of price movements, which is not about when housing prices rise or fall but about how prices have changed in one location relative to others. This thesis contributes to a better understanding of such heterogeneity by identifying a new dimension of supply elasticity, examining its role in housing boom and bust, and modeling its spillover effects across neighborhoods. Supply elasticity measures how much supply will increase when the price rises. In the housing literature, the three well-known determinants are geographic constraints, zoning controls, and land-use status. Interestingly, this thesis has found that they are not sufficient to explain the neighborhood supply elasticity in Hong Kong from 2003 to 2018. Instead, ownership constraints, arising from land and property title fragmentation, have played an important role. This can be explained by the tragedy of the anticommons: Title fragmentation leads to sub-optimal use of land, hinders housing developments, and decreases supply elasticity. This new dimension of supply elasticity measurement paves the way for the two following studies about the housing market cycles. This thesis argues that the literature’s conflict about the role of supply elasticity in the bust can be reconciled by re-examining the kinked supply curve. In a bust, the supply curve is often assumed to be perfectly inelastic, leading to homogeneous price reduction across locations. However, if construction work can be abandoned, the supply curve in the bust should be upward-sloping and vary across locations, as in the case of a boom. Given that stalled projects are extremely rare in Hong Kong even during the post-1997 crisis, it is confirmed using Spatial Error Model that relative price changes are associated with supply elasticity only in the boom but not in the bust. This boom-bust asymmetry is expected to be less evident in cities where project abandonment is common. While supply elasticity drives heterogeneous housing price movements in booms, location substitution can eliminate the appreciation difference and lead to price comovement. Thus, the literature debates whether supply elasticity differentiates price appreciation given the within-city substitution. This thesis revisits the questions with theoretical and empirical contributions. Firstly, it clarifies that three effects need to be tested to answer the question: 1) supply elasticity’s direct effect, 2) its spillover effect, and 3) the magnitude gap between the direct and the spillover effect. Secondly, it proposes two novel ways of controlling substitution using spatial models: land availability spillovers in the Spatially Lagged Independent Variable Model and the price comovements in the Spatial Durbin Model. Using the boom period of Hong Kong from 2003 to 2018, this thesis has delivered a clear answer that supply elasticity can shape the within-city housing price movements, and perfect substitution within the same city is unlikely.