Regional market size and the housing market: insights from a new economic geography model

The increased availability of information about housing and labour markets at finer spatial scales opens up possibilities for applied research to model various types of spatial relationships associated with housing affordability. The aim of this paper is to encourage empirical research to estimate the type of spatial relationships described by new economic geography (NEG) models. NEG models were designed to provide general equilibrium analysis of urban agglomeration, but may also be used to shed insights into the degree to which housing and labour markets could be integrated spatially. We extend the Helpman and Hanson NEG theoretical model by relaxing the stringent restrictions imposed on housing consumption and the size of the housing sector, so that it may be used to address the housing affordability issue. We highlight the differences that these refinements have on the implications for earnings, rents (house prices) and migration. In particular, simulations are undertaken to assess the conditions under which a responsive and non-responsive construction sector worsens or improves housing affordability and affects region size.