City characteristics, land prices and volatility

We develop a model that describes how city characteristics affect the volatility of real estate rents and values. The model includes agglomeration externalities, which amplify the effect of productivity shocks on population growth and rents, as well as city characteristics that constrain population growth. While growth constraints make rents more subject to productivity shocks because of the inelastic supply, they can also suppress the benefits of agglomeration, which has the effect of decreasing the sensitivity of rents to productivity shocks. Our dynamic model exhibits persistent rent growth and rent-to-value ratios that vary across cities and over time. In particular, we show that productivity shocks have a larger initial effect on rents in more constrained cities, but a greater long-term effect in less constrained cities.