The paper estimates the elasticity of the housing supply (the percentage change in the housing supply in response to the percentage change of house prices) for Italian cities and examines the consequences for employment and house price growth in response to a demand shock. The analysis is based on census data on the housing stock and employment and survey data on house prices for the provincial capitals over the last 40 years.
We find that an exogenous increase in labour demand determines a rise in employment and house prices. However, in cities with a more rigid housing supply, for example because of physical constraints to residential development and/or inefficiencies of the public administrations when dealing with construction permits, the impact on economic growth is significantly lessened, while the effects on house prices are greater.
Forthcoming in: Journal of Economic Geography.