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Supply Elasticity of Houses in Regional NSW
Xiang Ling Liu &
Glenn Otto UNSW
EMG Workshop 5 November 2014
2
Perception that Housing Supply in Australia is Inelastic “…there have been a number of factors on the supply side that have combined to keep the supply of new housing below where it would have been in a more responsive environment. As a result, we have had the combination of higher prices and lower supply than might otherwise have occurred.” (Tony Richards, 2009, RBA)
3
What is the supply elasticity of residential housing in Australia?
All Housing Ball, Meen and Nygaard (2010) Australia 0.55 Gitelman and Otto (2012) Sydney 0.33 Liu and Otto (2014) Sydney 0.51 Houses Apartments Gitelman and Otto (2012) 0.18 0.53 Liu and Otto (2014) 0.22 0.80
4
Why Regional NSW? Relatively good disaggregated data on house prices
Is housing supply more elastic in regional NSW than in Sydney?
5
Data Cross-section unit: Local Government Area (LGA) 101 LGAs Prices Median sales price for non-strata dwellings Raw data are quarterly observations beginning in 1991:1 Missing observations for some LGAs are “guesstimated” Converted to annual frequency by averaging quarterly calendar
year obs Sample 1991 – 2012 All series converted to real house prices using Sydney CPI
6
Real House Prices in LGAs of Griffith and Nambucca
0
50
100
150
200
250
300
350
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Tho
usa
nd
s ($
)
Griffith Nambucca
7
House Stocks Number of private non-strata dwellings Census data provide estimates for 1991, 1996, 2001, 2006 and 2011 Inter-censual years are interpolated using data on building approvals for
LGAs No accounting for quality of housing In most regional LGAs, non-strata dwelling = detached house
8
Number of Non-Strata Dwellings in LGAs of Griffith and Nambucca
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Nu
mb
er
of
Ho
use
s
Griffith Nambucca
9
Regional Groupings for LGAs 11 regions (Number of LGAs) Coastal Inland Hunter (11) Central West (13) Illawarra (5) Far West (1) Mid-North Coast (7) Murrumbidgee (12) Richmond-Tweed (6) Murray (9) South-Eastern (14) North-Western (11) Northern (12) Coastal means that at least some LGAs have a coastline.
10
Regional Map
11
Growth of Housing Stock and Real Prices by Region, 1991-2011
-20.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
Rich
mo
nd
-Twe
ed
Mid
-No
rth C
oast
Hu
nte
r
Illawarra
Sou
th-Easte
rn
No
rthern
Ce
ntral W
est
No
rth-W
este
rn
Mu
rrum
bid
gee
Mu
rray
Far We
st
% c
han
ge
Non-Strata Houses Real Prices
12
Increase in House Prices: 2002-2004 Feature of the data is a large increase in real house prices in most LGAs
from 2002-2004
13
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
1985 1990 1995 2000 2005 2010 2015
Normalised Real House Prices for Richmond-Tweed
14
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
1985 1990 1995 2000 2005 2010 2015
Normalised Real House Prices for North Western Region
15
NSW-Wide Common Shock Increase in demand curve for houses Reduction in supply curve for houses
If we assume the former, then can use the increase in house prices over 2002-2004 to estimate supply elasticity:
% Δ in stock of houses 2001 to 2005 _______________________________ % Δ in real house prices 2001 to 2005
16
Naïve Estimate of Supply Elasticity by Region
-0.04
-0.02
0.00
0.02
0.04
0.06
0.08
0.10
0.12
CW FW HT IW MN MB MR NW NT RT SE
Elas
tici
ty
17
Formal Supply Elasticity Estimates Use annual time-series data from 1991-2012 to estimate supply elasticity
for each of 101 regional LGAs
18
(Very) Simple Model Supply Curve
𝑙𝑛𝐻𝑡𝑖 = 𝛼𝑖 + 𝛽𝑖𝑙𝑛𝑃𝑡
𝑖 + 𝑢𝑡𝑖
Reduced Form
𝑙𝑛𝑃𝑡𝑖 = 𝜋0𝑖 + 𝜋1𝑖𝑙𝑛𝑌𝑡
𝑖 + 𝜋2𝑖𝑙𝑛𝑁𝑡𝑖 + 𝜋3𝑖𝑅𝑡 + 𝑣𝑡
𝑖 H = stock of non-strata properties P = real median price of non-strata properties Instruments Y = real income per taxpayer N = resident population R = real 10 year bond rate
19
Instrument Quality (income and real rate)
0
50
100
150
200
250
300
350
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100
F-st
at
LGA
20
Density Functions for Regional and Metropolitan Supply Elasticity
-1
0
1
2
3
4
5
-0.2 0 0.2 0.4 0.6 0.8 1 1.2
Supply Elasticity
Regional Houses Sydney Houses
21
Estimating Supply Elasticity: Nambucca (IV Estimate = 0.41)
y = 0.3106x + 7.1505 R² = 0.6852
8.6
8.65
8.7
8.75
8.8
8.85
8.9
8.95
9
9.05
5 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9
Log
Ho
use
s
Log Price
22
Estimating Supply Elasticity: Nambucca (1/2.21 = 0.45)
y = 2.2064x - 14.07 R² = 0.6852
4.9
5
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
8.6 8.65 8.7 8.75 8.8 8.85 8.9 8.95 9 9.05
Log
Pri
ce
Log Houses
23
Another Estimator ARDL Bounds Procedure (Pesaran, Shin and Smith, 2001)
∆𝑙𝑛𝐻𝑡𝑖 = 𝛿𝐻0
𝑖 + 𝛿𝐻𝑃𝑖 𝑙𝑛𝑃𝑡−1
𝑖 + 𝛿𝐻𝐻𝑖 𝑙𝑛𝐻𝑡−1
𝑖 + 𝜔𝐻𝑃𝑖 𝑙𝑛∆𝑃𝑡
𝑖 + 𝑣𝑡𝑖
𝐻0: 𝛿𝐻𝑃𝑖 = 𝛿𝐻𝐻
𝑖 = 0 Test for levels relationship between lnH and lnP If F-stat is “sufficiently small” then don’t reject null If F-stat is “sufficiently large” then reject null Range for F-stat where you need to pre-test for variables being I(1) or I(0)
If null is rejected, then estimate long-run supply elasticity by 𝛿𝐻𝑃𝑖
𝛿𝐻𝐻𝑖⁄
24
Correlation between IV and ARDL Estimates
-0.2
0
0.2
0.4
0.6
0.8
1
-0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 1.2
IV E
stim
ate
s
ARDL Estimates
25
Growth in Real House Prices and Supply Elasticity
“As a result, we have had the combination of higher prices and lower supply than might otherwise have occurred.” (Tony Richards) Do LGAs with lower supply elasticity have higher average capital gains?
26
Supply Elasticity and Real Capital Gains: Coastal Regions
y = -2.0525x + 4.3696 R² = 0.0771
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9
Re
al C
apit
al G
ain
(%
pa)
Supply Elasticity
27
Supply Elasticity and Real Capital Gains: Inland Regions
y = -0.9877x + 2.7978 R² = 0.0206
-2
-1
0
1
2
3
4
5
6
7
8
-0.2 0 0.2 0.4 0.6 0.8 1
Re
al C
apit
al G
ain
(%
pa)
Supply Elasticity
28
Why is Housing Supply in Regional NSW so Inelastic? 2 observations Average supply elasticity for houses in regional NSW (0.32) is not much
greater than in Sydney (0.2)
There are no regional LGAs with elastic housing supply 5 largest: Murray (0.9), Hastings (0.85), Great Lakes (0.79), Port Stephens (0.67) and Bathurst (0.64)
Why no regions like Dallas, Tampa-St Petersburg or Phoenix?
All of NSW looks like San Francisco
29
NSW Planning System Legislation
Planning and Environmental Assessment Act 1979 Environmental Planning and Assessment Regulation 2000
State Environmental Planning Policies (SEPPs) NSW-wide planning policies and procedures
Local Environmental Plan (LEP) zones all land within an LGA; including what developments and land uses can occur and under what criteria
LEPs need State Government approval
30
Some Unresolved Questions What criteria do Local Councils use to decide on the quantity of
land to zone as residential in their LEPs? Answer seems to be that they use population growth projections
What is the current stock of unused land that is currently zoned as
residential in regional LGAs?
Difficult to calculate this figure
31
Additional Slides
32
Supply Elasticity and Area of LGA
y = -0.066x + 0.7638 R² = 0.124
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
0 2 4 6 8 10 12
Elas
tici
ty
Log of Area
33
Estimates of Supply Elasticity by LGA
-0.2
0
0.2
0.4
0.6
0.8
1
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100
Elas
tici
ty
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