Houses across time and across place
by David Miles and James Sefton
Abstract
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 in di§erent countries 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 very different recent histories of ratios of housing costs to incomes across countries? We find that taking account of the fixity of land supply, rising populations and the changing technology of transport are central to the di§erent 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. We find that in many countries it is plausible that house prices could now persistently rise faster than incomes.
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