We build a theoretical model that relates house price, city size and the expected future growth of demand for housing. Our model combines the Alonso-Mills model on urban economics with insights from financial economics on house prices. Estimating the model for cities in the US, we empirically validate the positive effect of city size on urban house prices. Moreover, our estimations confirm that an (unrealistic) increase in the expected growth of demand fuelled by the widespread availability of credit provides a better explanation for the recent bubble than inelastic housing supply that explained earlier bubbles
