On the Relation between Innovation and Housing Prices – A Metro Level Analysis of the US Market

We examine the extent to which the quality of innovation created in different locations is related to subsequent changes in house prices in these metropolitan areas. Cities that foster a healthy quality of innovation are likely the home of many successful entrepreneurs and firms that provide high paying jobs. We hypothesize that the relation between innovation and changes in house prices is positive because, all else equal, locations with higher quality of innovation should not only be more desirable places to live, but also support higher rate of wealth and income growth, which allow for higher house price appreciation. We find results consistent with our hypothesis: there is a statistically and economically significant positive relation between innovation quality and subsequent house price appreciation. We find that this association runs from innovation quality to house price appreciation but not the reverse, and that the effect is stronger in areas with inelastic land supply.