Working Paper: NBER ID: w27370
Authors: Caitlin S. Gorback; Benjamin J. Keys
Abstract: Interconnected capital markets allow mobile global capital to flow into immobile local assets. This paper examines how foreign demand affects U.S. housing markets, and uses this demand shock to estimate local price elasticities of supply. Other countries introduced foreign-buyer taxes meant to deter Chinese housing investment beginning in 2011. We first show house prices grew 8 percentage points more in U.S. zipcodes with high foreign-born Chinese populations after 2011, subsequently reversing with the onset of the U.S.–China trade war. Second, we use international tax policy changes as a U.S. housing demand shock and estimate local house price and quantity elasticities with respect to international capital. We find that a 1% increase in instrumented foreign capital raises house prices at the zip code level by 0.27%, and housing supply by 0.004%. Finally, we use the two elasticities to construct new local house price elasticities of supply for the largest 100 CBSAs. These supply elasticities average 0.1 and vary between 0.02 and 0.7, suggesting that local housing markets are inelastic in the short run and exhibit substantial spatial heterogeneity.
Keywords: Foreign Capital; Housing Markets; Price Elasticities; Supply Elasticities
JEL Codes: K25; R21; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| foreign buyer taxes in 2011 (F38) | house prices in U.S. zip codes with high foreign-born Chinese populations (R23) |
| 1% increase in instrumented foreign capital (F21) | house prices at the zip code level (R31) |
| 1% increase in instrumented foreign capital (F21) | housing supply (R31) |
| foreign capital flows (F21) | local house price elasticities of supply (R31) |
| differential price gain in immigrant enclaves (J69) | fallen sharply since 2018 (P27) |