The impact of urban population on housing cost: the case of Australia

Rapid population expansions in urban areas have significant implications for housing costs, creating challenges for housing affordability. However, estimating the causal effect of population on housing costs is challenging due to various confounding issues, such as unobserved location-specific attributes, measurement error, and the potential bi-directional relationship between population and housing costs. To address them, we adopt a city-level analysis and introduce a novel instrumental variable (IV) that enables us to employ fixed effects IV estimation. Our findings indicate that housing costs tend to increase at a faster rate than population growth. As individuals and households with lower incomes tend to allocate a larger proportion of their earnings to housing expenses, an upward trajectory of housing costs may dramatically widen the inequality in income after housing expenditure.