Elasticity of Supply: Why Housing is Unaffordable

Why are houses and apartments so expensive in some big cities? To an economist, the real question is, “Why is housing supply inelastic in some cities?”

Alex Tabarrok explains the definition of elasticity with a simple real-world example. When good jobs are created in a city, more people want to move there–an increase in demand for housing. A supply and demand graph shows that this should lead to a new market equilibrium with a greater quantity of housing sold, at a higher price. But which will increase more, price or quantity? This depends on the elasticity of supply.

In many cities (like San Francisco), natural and legal constraints on building new homes make it hard to produce new housing, so the supply is inelastic–price increases a lot; quantity increases only a little. Other places (like Auckland, New Zealand) have liberalized their housing markets, leading to more elastic supply. Affordable housing often comes down to elastic vs inelastic supply!