Discussion paper

DP12103 Houses across time and across place

This paper develops a model of the evolution of housing and of housing costs over time and across locations. It aims to understand how housing wealth and the cost of housing have moved over the past and how they might evolve into the future. We use a framework that combines features of a Ramsey two-sector growth model with a model of the geography of residential development that tracks the change in location of the population over time. We use the model to cast light on several issues: Can we expect housing costs to continue rising relative to the price of other goods? Are there conditions where housing costs can be expected to persistently rise faster than incomes? What accounts for the tendency of housing costs in some countries to rise in real terms but at a rate slower than the rise in incomes while in other countries housing costs to income ratios have been on an upwards trend for decades? We find that taking account of the fixity of land supply, rising populations and the changing technology of transport are central to the different paths of housing costs and patterns of residential development across developed economies. We also find that the future path of housing costs is extremely sensitive to two parameters -
elasticities of substitution between land and structure in creating housing services and substitutability between housing and consumption goods in utility. The interactions between factors that affect the geographic pattern of housing development and macroeconomic outcomes are explored and we draw out implications for policy.

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Citation

Miles, D and J Sefton (2017), ‘DP12103 Houses across time and across place‘, CEPR Discussion Paper No. 12103. CEPR Press, Paris & London. https://cepr.org/publications/dp12103