## The Economics of Housing

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**Canonical URL:** [The Economics of Housing](https://www.imf.org/-/media/files/publications/fandd/article/2024/12/loungani.pdf)

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### Macroeconomics and housing: gaps and consequences
- Housing is central to understanding business cycles; Edward Leamer argued in 2007 that “Housing IS the Business Cycle.”
- Macroeconomics often neglects sectoral developments at the housing level, creating a need to “build walkways to housing economics rather than simply walling it off.”
- If macroeconomists had integrated real estate economics more fully, they “might have better anticipated developments during the 2008–09 global financial crisis” and recent policy conundrums.

### Housing affordability, spatial productivity, and labor markets
- Cities are among the world’s most productive places yet accommodation in many cities is prohibitively expensive even for relatively high-paid professionals.
- Workers who must be physically present (police officers, teachers, nurses, delivery drivers) cannot generally substitute remote work to find cheaper housing.
- Across the Organisation for Economic Co-operation and Development’s mostly rich countries:
  - House prices have risen by almost 40 percent in real terms over the past decade.
  - The cost of a home in the United States is up by about 50 percent.
- Demand factors: increases in population and income have spurred strong housing demand.
- Supply constraints: land-use regulations (for example, preventing neighborhoods with single-use housing from allowing multifamily housing) restrict how many housing units can be built on a particular plot of land.
- Intergenerational and generational concerns:
  - 60 percent of people aged 18–29 reported being somewhat or very concerned about securing adequate housing.
- Business impacts: firms report affordability is forcing them to pay higher wages and budget for higher labor costs.

### Global distributional impacts and intensity of affordability problems
- Affordable housing shortages are acute among the poorest:
  - In Colombia, 82 percent of renters in the lowest income quintile hand over more than 40 percent of their income to private landlords, according to the OECD.

### Housing, household debt, and macro-financial risks
- Expensive homes and high rents can push people to take on too much debt.
- Household borrowing can boost economic growth in the short term but imposes costs later: consumers cut spending to make repayments, the economy slows, and unemployment rises (as the IMF has shown).
- Country example: In China, a housing downturn has had a significant impact on consumption.
- Sudden shocks (for example, a collapse in home prices) can trigger spirals of credit defaults that shake the financial system.

### Monetary policy transmission through housing: complexity and variation
- Central banks face the challenge of assessing how increases in interest rates engineered to subdue inflation affect housing markets and the broader economy.
- Channels through which interest rates affect housing are complicated and shift over time; they require deep country-specific knowledge of housing markets.
- Key factors that shape monetary policy potency include:
  - Prevalence of fixed-rate mortgages, which can vary from close to zero in South Africa to more than 95 percent in Mexico and the United States.
  - Extent of homeowner debt.
  - Extent of supply restrictions.
  - Extent of house price appreciation and possible overvaluation, which can be very difficult to measure.
- The strength of these channels changes over time:
  - The share of fixed-rate mortgages has increased recently in many countries.
  - The availability of refinancing differs across economies and over time.
- Practical implication: a deep country-specific understanding of housing markets is needed to calibrate monetary policy.

### Rights, policy attention, and political salience
- Housing is recognized as a right in documents such as the 1948 Universal Declaration of Human Rights and similar international treaties.
- By contrast with food (SDG 2 to end hunger), housing receives little mention in the Sustainable Development Goals.
- UN and IMF responses to food price shocks are prominent (World Food Programme, new IMF loan programs); shelter receives far less comparable global emergency attention.
- Housing affordability has become a major issue in several national and local electoral races.

### Lessons and policy implications
- Integrating real estate economics with macroeconomics would improve understanding of:
  - The sources and likely duration of the 2021–22 upsurge in inflation.
  - How to achieve a “soft landing” (slowing the economy to tame inflation without tipping it into recession).
- Deeper knowledge of house price and rent dynamics is necessary to interpret measures of the cost of living and to understand consumer sentiment amid rising borrowing costs for housing.

*Source: Prakash Loungani, F&D, DECEMBER 2024.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/12/loungani.pdf_