A Housing Supply Absorption Rate Equation

Abstract

What is the optimal rate of new housing supply? We answer this question with a simple model of new housing supply where the choice variable is the rate of new housing lot sales. This model is informed by the cost-side assumptions of the static equilibrium model but allows for demand for home-buying to vary over time. It differs from static models of housing production equilibrium by assuming that landowners hold land assets that are sold in asset markets to create new supply. Landowners maximise the present value of their balance sheet by choosing a rate of new housing lot sales, accounting for the effect on asset price growth from their sales in a housing market of finite depth. The resulting absorption rate equation has radically different parameter effects compared to the popular static housing density model. Constraints on density, for example, increase the optimal rate of supply by reducing the return to delaying development. Interest rates, land value tax rates, and demand growth, positively relate to the optimal rate of supply. The policy lessons are (1) the relationship between demand growth and the optimal supply rate limits the ability for market supply to reduce prices, and (2) increasing the cost to delaying housing development is the primary way to increase the market rate of housing supply.

Housing Sustainability: The Effects of Speculation and Property Taxes on House Prices within and beyond the Jurisdiction

“…Similarly, unemployment and population cover housing demand, whereas the number of units created and the vacancy rate represent the local supply of the houses [65]. All these variables are significant in assessing local housing market response in terms of housing market activity (units sold) and changes in house prices across multiple cities [28].…”

“…However, limited studies [57,64] have adopted the aggregate impact of both forms of tax policies and have analyzed price variation between cities. Furthermore, national-and provincial-scale aggregate data, ignoring intercity demand and supply heterogeneity, will limit the strength of a conclusion [53,65]. Additionally, considering the importance of geographic variation, the tax policy impact beyond its administrative jurisdiction is one of the vital aspects that remains under-researched.…”

We zoned for density and got higher house prices: Supply and price effects of upzoning over 20 years

“…The alternative story is that planning regulations allow for additional dwellings, but that the price level determines the viability of redevelopment and price growth determines the rate of new supply out of these viable sites as landowners and developers schedule their new dwelling sales and development to maximise returns (the absorption rate model described in Murray (2020a)).…”

Land as airspace: How rezoning privatizes public space (and why governments should not give it away for free)

“…As an analogy, lane markings on a road that regulate where vehicles must locate are conceptually distinct from speed limits. The rate of new housing supply, known as the market absorption rate, is a built-in speed limit on new housing supply even without planning and zoning regulations, or where there is a large amount of zoned capacity to develop new housing (Murray, 2020(Murray, , 2021a. Privatizing public airspace not necessarily change any private economic incentives to develop new housing faster.…”

“…However, government reviews into the rate of homebuilding in the United Kingdom have noted that market factors determine the rate of housing supply (Letwin, 2018). Known as the absorption rate, the rate of supply appears unaffected by the density of allowable housing development (Murray, 2021a). Privatizing airspace on the assumption that increased density equates to a faster absorption rate is, therefore, highly questionable.…”