Büchler, Simon; v. Ehrlich, Maximilian; Schöni, Olivier (2021). The amplifying effect of capitalization rates on housing supply. Journal of urban economics, 126, p. 103370. Elsevier 10.1016/j.jue.2021.103370
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We provide empirical evidence that increases in housing rental income lead to a larger supply response than price increases of the same percentage value. We rationalize this differential in supply responsiveness with an amplification mechanism arising from a downward revision of capitalization rates following a rental income increase. We document that the amplification of the housing supply price elasticity is less pronounced in geographically constrained and tightly regulated neighborhoods and areas having more sophisticated investors. Our findings hold valuable lessons for public policies affecting the housing rental income, such as rent control and housing subsidies.
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