Local house price developments and housing supply

Purpose In this paper, we identify the relationship between (local) housing supply and (local) house price developments, especially in The Netherlands. Design/methodology/approach We measure the influence of new building on house prices by comparing areas designated for concentrated new building (main Dutch cities) with areas where no large housing projects are developed. On the basis of classical economic theory, if the housing market is functioning as it should, then supply will soon respond to a shock in demand and restore stability in house prices. Findings For the main Dutch cities, we found that an increase in supply triggers a fall in prices. In other areas the correlation coefficients are more or less zero, which can lead us to conclude that the expansion of the housing stock is market‐compliant. Research limitations/implications The housing market is not functioning, as it should: new supplies depend on the complex decisions of the suppliers, thus making it difficult to express statistically the causality between the house price developments and the new supplies. Practical implications Most studies suggest that macro data are unable to measure the true dependency between the house prices and the new building and claim at the same time that micro data sets are incomplete. Also our research was hampered by a shortage of usable data. Originality/value New building can push up the value of the surrounding housing because it is associated with a qualitatively better housing stock. We conclude that in regions where new building has been concentrated in designated areas, the relationship between housing production and price development is inverse.