Today we are pleased to present a guest contribution by James Cabral (University of Toronto) and Walter Steingress (University of Wisconsin). The views expressed are solely those of the authors, and do not necessarily represent the institutions with which they are affiliated.
In recent years, many developed economies have seen an increase in immigration, which has sparked discussions about its economic impacts, particularly on housing and rental costs. This short note presents a summary of our recent paper (Cabral and Steingress, 2024) on the effect of immigration on local housing prices and rents in the United States.
1. Channels of Influence:
There are various channels through which immigration can affect local housing prices and rents.
- New immigrants arriving in the US need housing and thus increase demand, putting upward pressure on shelter costs.
- The magnitude of this demand shock will depend on the skill development of immigrants as educated immigrants tend to have more money and can afford expensive housing compared to less educated immigrants.
- The magnitude of this demand shock will depend on the underlying supply conditions of the local housing market. If immigrants arrive in a housing market where supply can increase, the impact on housing prices will be muted compared to a housing market where it is more difficult to add homes.
2. Critical Analysis:
Our material analysis is based on detailed county-level data for the period 1985—2019. To verify the causal relationship between immigration prices and housing prices, we use a shift-share tool based on the composition of the ancestors of residents in each US state following Terry et al (2023). This tool leverages population ancestry composition and the timing and size of national immigration of immigrants from ancestrally matched countries of origin to predict current immigration flows in a given region of the United States.
3. Key Findings:
- Immigration equal to 1% of the county’s population is associated with a 3.5% increase in median home prices and a 2.0% increase in rents.
- The impact varies greatly based on immigration levels relative to education and local conditions of housing supply (see Figure 1).
- In a state with the most restrictive issuance of building permits to highly educated immigrants, the immigration of 1 percent of the state would increase shelter rates by 6-8%.
- In a county with a limited issuance of building permits and a very low level of immigrant education, the immigration of 1 percent of the county can reduce housing prices by 0-2% compared to a county that does not receive immigrants.
Figure 1: Distribution of Estimated House Price Effect
Notes: The figure includes the estimated impact of new immigrants during the sample period obtained from the estimates presented in column (3) of Table 2 in Cabral and Steingress (2024).
4. Overall Impact:
Armed with the estimated effects of immigration on housing prices and immigration flows, we can calculate a model specifying the contribution of immigration to identify changes in US housing prices.
- The overall impact of immigration on shelter price growth is small, contributing less than 2 percent to the increase. The main reason is that immigration accounts for a small part of local population changes.
- If we apply our estimates to US population change and account for changes in the educational composition of counties, our model can explain 59% of the observed change in local housing prices and 47% of the observed change in rental prices.
5. Conclusion:
Our analysis suggests that immigration to the United States has a significant but variable impact on housing prices, depending on geographic conditions and immigrant characteristics. Immigration serves as a useful tool for identifying the causal effects of population movements on housing prices, providing insights into how both national and international population movements affect the local housing market. Overall, our results suggest that the main cause of housing price growth in the United States is the migration of people from this country to all US states.
This post was written by James Cabral again Walter Steingress.
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