Erlend Eide Bø and Stefan Leknes:
Abstract: Many urban neighborhoods are characterized by soaring housing prices and gentrification. Can construction of market rate residential housing be a remedy? New housing increases local supply, and could lead to falling prices if local demand is limited. However, new housing generally has a higher standard than older housing and may attract wealthier residents, which could increase the prices of existing housing through positive neighborhood externalities. Using detailed housing data from Norway's capital Oslo, we study how housing prices and residential composition of existing housing are affected by market rate construction nearby. We deal with endogenous location of new constructions by instrumenting with available space for development and controlling for micro neighborhoods. We find that the effects on housing prices and incomes of residents are negative, but small, suggesting that the supply effect is larger than any positive neighborhood effect.
