Walkways, Not Walls

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Macroeconomics often neglects smaller micro developments at the business or sectoral level, especially the housing sector.
Edward Leamer (2007) argued in “Housing IS the Business Cycle” that the housing market is central to understanding booms and busts; nearly all recessions in the United States since World War II were preceded by problems in the housing sector.
The author’s thesis: macroeconomics would be better served by building walkways to housing economics rather than walling it off.

Cities are highly productive engines of economic expansion, but accommodation in many cities is prohibitively expensive even for relatively high-paid professionals and essential workers who must work in person.
Across the OECD’s mostly rich countries, house prices have risen by almost 40 percent in real terms over the past decade, with the cost of a home in the United States up by about 50 percent.
Demand drivers: increases in population and income.
Supply constraint driver: land-use regulations (such as preventing neighborhoods with single-use housing from allowing multifamily housing), which restrict how many housing units can be built on a particular plot of land.
Political and social effects: risks exacerbating intergenerational inequality—60 percent of people aged 18–29 reported being somewhat or very concerned about securing adequate housing.
Business effects: affordability is forcing firms to pay higher wages and budget for higher labor costs.
Global inequality example: in Colombia, 82 percent of renters in the lowest income quintile hand over more than 40 percent of their income to private landlords.

Expensive homes and high rents can push people to take on too much debt.
Household borrowing can boost short-term growth but imposes later costs: consumers cut spending to make repayments, the economy slows, and unemployment rises, as the IMF has shown.
Example: in China, a housing downturn has had a significant impact on consumption.
Systemic risk: a sudden economic shock—such as a collapse in home prices—can trigger a spiral of credit defaults that shakes the financial system.

Two central macroeconomic challenges faced in the recent period: understanding the sources and likely duration of the 2021–22 upsurge in inflation; and achieving a “soft landing” by slowing the economy to tame inflation without tipping it into recession.
Housing complicated both issues: the role of house prices and rents in measures of the cost of living surprised many macroeconomists and affected consumer sentiment.
Monetary policy calibration is difficult because the channels through which interest rates affect housing markets are complicated and shift over time; understanding them requires deep, country-specific knowledge of housing markets.

Prevalence of fixed-rate mortgages can vary widely: from close to zero in South Africa to more than 95 percent in Mexico and the United States.
Other relevant factors: extent of homeowner debt, extent of supply restrictions, and extent of house price appreciation and possible overvaluation.
These channels’ strength changes over time: e.g., the share of fixed-rate mortgages has increased recently in many countries; availability of refinancing differs across economies and over time.

Housing receives limited prominence in international policy frameworks compared with food: the 1948 Universal Declaration of Human Rights and other treaties recognize the right to adequate housing, yet housing gets barely a mention in the SDGs.
The eradication of hunger is explicit in the UN’s Sustainable Development Goals (SDG 2 is to end hunger) and prompts international responses to food price shocks; shelter often receives far less coordinated attention despite pervasive affordability problems.
Political salience: housing affordability has surfaced as a major issue in several national and local electoral races.

F&D Magazine article “Walkways, Not Walls” by PRAKASH LOUNGANI, December 2024.

Walkways, Not Walls
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