Structural Estimates of Supply and Demand Elasticity for Houses in Sydney

Abstract

We report estimates of supply and demand elasticities for houses (i.e., non-strata properties) in three geographic locations of Sydney. In the Inner Ring of Local Government Areas (LGAs)—those closest to the Central Business District (CBD)—our estimates indicate that the supply curve for houses is perfectly inelastic. This finding allows us to condition on the stock of houses and estimate the corresponding Inner Ring demand curve using ordinary least squares. In the Middle and Outer Rings—where the supply curve for houses has positive elasticity—we use instrumental variables to estimate the demand curve for houses. For all three locations, we obtain theoretically reasonable point estimates of standard demand elasticities, although the degree of uncertainty surrounding the Outer Ring estimates is relatively large. Averaging across the three regions of Sydney, the price elasticity of demand for houses is −1.3, cross-price elasticity with units is 1.1, and income elasticity is 2.1. Based on our elasticity estimates, only in the Outer Ring are any of the direct burdens of stamp duty born by buyers (about 40 percent).

Keywords

• housing supply
• housing price bubbles
• supply elasticity