Fundamental and Speculative Demands for Housing

IMF Working Papers, March 19, 2019

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The paper separates the roles of demand for housing services and belief about future house prices in a house price cycle.
It utilizes a feature of user-cost-of-housing that it is sensitive to demand for housing services only.
Optimality conditions of producing housing services determine user-cost-of-housing and the elasticity of substitution between land and structures in producing housing services.
Key quantitative finding: demand explained four fifths of the U.S. house price boom in the 2000s.

Uses the sensitivity of user-cost-of-housing to isolate demand for housing services from beliefs about future house prices.
Derives user-cost-of-housing from optimality conditions of producing housing services.
Estimates (or infers) the elasticity of substitution between land and structures in the production of housing services.
Emphasizes amplification of demand effects on house prices when the elasticity of substitution is small.

The impact of demand for housing services on house prices is amplified by a small elasticity of substitution between land and structures.
Demand for housing services accounted for four fifths of the U.S. house price boom in the 2000s.
The approach distinguishes fundamental demand-driven price movements from speculative (belief-driven) movements via the user-cost-of-housing construct.

Subject: Consumption, Housing, Housing prices, Land prices, National accounts, Price structures, Prices
Keywords: Asset Bubbles, Belief, Consumption, consumption goods, house price trend, Housing, Housing Cycles, housing demand shocks, Housing prices, housing service, Land Prices, Land Share, price change, Price structures, production function, services production function, structure price, WP