The long-run price elasticity of supply of new residential construction in the United States and the United Kingdom

Most housing models, and most policy analysis, hinge on explicit or implicit estimates of the price elasticity of supply of housing: does the market respond to demand side shocks with more supply or higher prices'? Building on a model originally developed by Steve Mayo, we estimate the price elasticity of supply of housing from new construction separately for the United States and for the United Kingdom. We examine the supply elasticity over a very long time frame-from the previous century. There is strong evidence of a "regime shift" in 1914-1947; over the entire period, prices rise in both countries, but not in a continuous manner. Post World War 11, the United States is essentially flat, albeit with very large cycles. In the UK, relative housing prices generally rise postwar. According to our flow model, in the prewar United States our implied price elasticity is between 4 and 10, postwar it is between 6 and 13. In the prewar UK our implied price elasticity is between 1 and 4, postwar it is between 0 and 1. Stock adjustment models yield different price elasticities-surprisingly so, in our judgment. They range from I to 6 for the United States, and from 0 to I for the UK. We believe the stock adjustment models are particularly fruitful areas for additional work. (C) 2001 Elsevier Science.