You are here

Distant Shocks, Migration, and Housing Supply in India

Arnab Dutta, Sahil Gandhi, Richard K. Green
India has the second-largest urban population in the world. Yet, very little is known about its housing markets. In this paper, we use a panel instrumental variable framework to estimate the supply elasticity of temporary, permanent, and vacant residential housing units in urban India. We use two migration-inducing exogenous events — negative rainfall shocks and a highway upgrade program — occurring in a distant state as demand shifters for local urban housing markets. We apply the Rosen-Roback spatial equilibrium setting to show that both the negative rainfall shocks and the highway upgrade program in a distant state increase inter-state migration. This increase leads to higher population and household growth, and therefore, higher demand for housing in local urban markets. Our findings are three-fold. First, we estimate the supply elasticity of permanent housing in urban India to be 1.64. This is similar to Saiz’s estimate of 1.75 for metropolitan areas in the United States. Second, we find that the supply elasticity of temporary housing to be −0.55. Negative supply elasticity of temporary housing is consistent with the existence of urban gentrification through the demolition and upgrading of slums. And finally, we estimate the elasticity of vacant residential housing unit supply to be 2.63. We posit that a relatively higher vacant housing unit elasticity indicates speculative building by developers.