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!

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00:00 Why is housing so expensive?
01:17 Housing market graph - ELASTIC supply
01:30 Housing market graph - INELASTIC supply
02:14 Geographical restrictions - water
02:27 Zoning restrictions
02:39 San Francisco
03:11 More hurdles to build new housing
04:06 Graph - Increase in demand, Inelastic supply
05:02 Bidding up the price - Buyers compete with buyers
05:41 Incentives for higher property values
05:56 Losing the bidding war
06:30 Zoning reform - Good news from New Zealand!