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Why is the rent so darn high? The role of growing demand to live in housing-supply-inelastic cities

2021; Elsevier BV; Volume: 124; Linguagem: Inglês

10.1016/j.jue.2021.103369

1095-9068

Greg Howard, Jack Liebersohn,

Urban, Neighborhood, and Segregation Studies

Real rents measured in the United States CPI increased 17.4 log-points from 2000 to 2018. We present a spatial equilibrium framework to decompose the increase into several channels, including demand to live in housing-supply-inelastic cities. We find location demand contributed significantly: using parameterizations from the literature and a new rent index, we find it is responsible for between 17 and 73 percent of the overall rent increase, and an even larger share in cities where CPI is measured. The wide range is primarily due to a lack of consensus over the population elasticity to rents, so we estimate it by comparing the effects of demand shocks across cities of differing housing supply elasticities. We find that demand changes have similar effects across cities, suggesting a high population elasticity. Therefore, our preferred estimate is that location demand accounts for more than half of the increase. We discuss implications for housing supply policy.