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Global Capital and Local Assets: House Prices, Quantitites, and Elasticities

Working paper #833
Caitlin Gorback and Benjamin J. Keys

Interconnected capital markets allow mobile global capital to flow into immobile local assets. This paper exploits foreign demand shocks to the U.S. housing market to estimate local price elasticities of supply. Other countries introduced foreign-buyer taxes beginning in 2011, intended to deter foreign housing investment. We show house prices grew 6 to 9 percentage points more in U.S. zipcodes with high foreign-born populations after 2011, subsequently reversing with the cooling of global-U.S. relations post-2017. We use these international tax policy changes as a U.S. housing demand
shock and estimate local house price and quantity elasticities with respect to international capital. The ratio of these two elasticities yields a new estimate of the local house price elasticity of supply, which we construct for 100 large U.S. cities. These supply elasticities average 0.26 and vary between 0.06 and 0.9, suggesting that local housing markets are currently inelastic and exhibit substantial spatial heterogeneity.

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