Abstract

We examine the relation between location, liquidity, and prices in urban housing markets. Leveraging a new dataset that encompasses transactions and advertisements of apartments in large German cities over the last decade, we empirically show that housing market liquidity and prices jointly decline with distance to the city center. We build a spatial search model to demonstrate how travel costs to the city center explain this joint spatial distribution. We estimate the model and find that it quantitatively matches the data, and that spatial liquidity differences due to search frictions account for a quarter of the spatial price gradient. Finally, we conduct a counterfactual analysis, showing that prices in the city center are 4% to 9% higher than in the periphery due to higher liquidity.