Intra-metropolitan Housing Supply Elasticity in Australia: A Spatial Analysis of Adelaide

Abstract

This paper extends the work of McLaughlin (2011 and 2012) and Gitelman and Otto (2012) by estimating new housing supply within a single metropolitan area. Specifically, we estimate supply elasticity for local governments areas (LGAs) in Adelaide, South Australia between the years 2001 and 2010. In addition, we extend McLaughlin's and Gitelman and Otto's analyses by testing for the effects of geographical location, local resident income, land area, and spatial dependence on new housing supply. Based on implementation of an urban growth boundary by the State of South Australia, as well as resistance to new growth by local residents in Adelaide, we hypothesize LGAs with higher incomes, smaller land areas, central locations, and adjacent to LGAs with greater approvals to permit less new development and have lower supply elasticity. We employ the urban growth model of new housing supply developed by Mayer and Somerville (2000a and 2000b), and employed in Zabel and Patterson (2006) and McLaughlin (2011 and 2012), to estimate the elasticity of new housing supply within the Adelaide metropolitan area. Our findings suggest that the elasticity of new supply is between 10.8 and 12.2 over 10 quarters. Furthermore, we find that land area and proximity to the coast is positively correlated with new housing supply, while average income of an LGA's residents and level of building approval activity in neighboring LGAs is negatively correlated with new supply.