Housing Prices Propagation: A Theory of Spatial Interactions
joint with Guillaume Chapelle, Jean-Benoît Eyméoud and Etienne Wasmer
Abstract: Price-to-rent ratios in the housing market vary a lot in time and space, and this cannot be explained solely by differences in local discount rates or rent growth differences. We study a variant of asset pricing equations for housing markets that include a price gradient in space, analogous to the transport equation in physics. The rationale for it is the existence of spatial search frictions for housing. A parametrization, backed by data, implies that a 10% increase in the price of an adjacent city raises the price of the city by approximately 0.05%. These effects cumulate over time and space and lead to a 15% increase in prices in the periphery after 30 years. More complex asset price equations such as heat diffusion equations are also derived from the search friction model and briefly discussed but second order terms are not found in the data.