We build a theoretical model that relates house price, city size and the expected future growth of demand for housing. Our model combines the Alonso-Mills model on urban economics with insights from financial economics on house prices. Estimating the model for cities in the US, we empirically validate the positive effect of city size on urban house prices. Moreover, our estimations confirm that an (unrealistic) increase in the expected growth of demand fuelled by the widespread availability of credit provides a better explanation for the recent bubble than inelastic housing supply that explained earlier bubbles.

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Keywords bubbles, city size, house prices
JEL M, Business Administration and Business Economics; Marketing; Accounting (jel), M13, New Firms; Startups (jel), O32, Management of Technological Innovation and R&D (jel)
Publisher Erasmus Research Institute of Management (ERIM)
Persistent URL hdl.handle.net/1765/20380
Thissen, M.J.P.M, Burger, M.J, & van Oort, F.G. (2010). House Prices, Bubbles and City Size (No. ERS-2010-030-ORG). ERIM report series research in management Erasmus Research Institute of Management. Erasmus Research Institute of Management (ERIM). Retrieved from http://hdl.handle.net/1765/20380