Differentiated New Housing: Implications for Market Equilibrium and the Effect of Shocks

Authors

• Dr. oecon Anne Wenche Emblem University of Agder https://orcid.org/0000-0001-7907-7921
• Dosent Trond-Arne Borgersen Østfold University College https://orcid.org/0000-0002-0105-8883

DOI:

https://doi.org/10.30672/njsr.177940

Keywords:

differentiated housing, housing prices, monopolistic competition, markup constraints, elasticity of housing supply

Abstract

It is widely established that housing supply is differentiated across multiple dimensions, and a substantial body of empirical research has explored how various housing and locational characteristics influence prices. While the responsiveness of housing supply to price changes is of both theoretical and practical importance, the supply side of the housing market remains relatively underexplored. This paper revisits core economic insights on product differentiation and examines their implications for housing prices and supply elasticity. We question the common assumption that increased housing supply necessarily dampens prices. Instead, we propose that higher supply, when accompanied by increased differentiation, may indeed reduce the elasticity of supply, making supply less responsive to rising demand. By means of a simple theoretical model, we show that when housing supply is more differentiated, demand shocks tend to produce sharper price increases and more limited changes in housing quantity, compared to markets with more uniform supply. These insights are highly relevant to housing market debates and should be considered, despite the methodological challenges of estimating price effects from unobservable housing attributes.

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