Das House Kapital: A Long-Run Theory of House Prices and Housing Wealth

Over the last 70 years, many advanced countries have experienced growing real house prices and an increasing housing wealth-to-income ratio. To explain these long-run patterns, this paper introduces a novel multi-sector growth model where housing services are produced using non-reproducible land and reproducible structures. Land is also employed in the non-housing sector. First, we identify two fundamental mechanisms driving the long-run increase in the real house price: (i) technological progress in the construction sector lags behind the technological progress of the rest of the economy and (ii) housing production is more land-intensive than non-housing production. Second, we study transitional dynamics for the US, UK, France, and Germany. Our calibrated model explains most of the observed increase in the housing wealth-to-income ratio since 1950. Counterfactual experiments identify initially low stocks of residential structures and non-residential capital as key exogenous drivers for this increase. The associated investment incentives led to a long-lasting construction boom and steadily increasing land scarcity, boosting residential land prices.