Housing and the Economy: After the Short Run

Abstract

Much of the attention regarding the role of housing and the economy has been concerned with traditional macroeconomic business cycle problems, such as the role of housing as a stabilizer or destabilizer in the macro economy in the “short run.” Here the focus is on the periods beyond that. In particular, housing is a capital good, a part of the capital stock, which is a substitute for other uses of capital, and the paper focuses on adjustment of housing and other capital after the short run. A central point of the paper is that the medium and long term impacts of policy, and other, shocks on housing can be quite different from the short run effects. Short run impacts can be reversed in the medium run. For instance, the currently most popular and largest form of tax subsidy for housing, not taxing imputed rent, will in initially lead to more housing and less business capital, but after the initial shock business capital growth will accelerate and eventually return to its initial level, but the housing stock will be higher.