Macroeconomics and Housing: A Review of the ♠ Literature

Charles Leung♥ Chinese University of Hong Kong
First Draft: August 2003 This version: September, 2004

Acknowledgement: This is prepared for the “Housing market and the Macro Economy: the nexus” workshop, Hong Kong, August 2003. The author thanks Stanley Engerman, Nobuhiro Kiyotaki, an anonymous referee, Robert Edelstein, and seminar participants for many useful suggestions. Edelstein in particular offers an usual amount of help which significantly improves the paper. Eric Hanushek generously assisted the author to gain access to documents at Stanford University. Youngman Leong has provided excellent research assistance. The financial support from RGC Earmark grant and Chinese University of Hong Kong Direct Grant are gratefully acknowledged. The usual disclaimer applies.

Correspondence: charlesl@cuhk.edu.hk, http://www.cuhk.edu.hk/eco/staff/kyleung

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Introduction
In his encyclopedic collection of writings about Origins of Macroeconomics, Robert Dimand includes a set of important contributions to macroeconomics, by many of the most eminent contributors (in alphabetical order): W. H. Beveridge, Milton Friedman, Roy Harrod, J. R. Hicks, John M. Keynes, Frank Knight, Tjalling Koopmans, Simon Kuznets, Alfred Marshall, Karl Marx, Lloyd Metzler, Ludwig von Mises, Franco Modigliani, Bertil Ohlin, A. C. Pigou, Frank Ramsey, Paul Samuelson, Joseph Schempeter, Jan Tinbergen, James Tobin, and Allyn Young. Only one article therein is related to the housing market, which is the debt deflation-paper by Irving Fisher (1933). This compendium is not an exception but rather a reflection of the apparent disconnect between macroeconomics and housing research. Among the 40 papers selected for Landmark Papers in Economic Fluctuations, Economic Policy and Related Subjects (edited by Nobel Prize Winner Lawrence Klein), the only paper focusing on the housing market is “The Relation of Home Investment to Unemployment” by R. F. Kahn. Among the 11 papers contained in Landmark Papers in Economic Growth, (edited by Nobel Prize Winner Robert Solow), and the 32 papers in Landmark Papers in Macroeconomics, (edited by Nobel Prize Winner James Tobin), none is dealing directly with
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the housing market.1 Standard macroeconomics textbooks either treat housing as one of many consumption goods, or neglect it all together. “Mainstream macroeconomics,” simply put, ignores the housing market. Conventional housing economics and urban economics research for its part virtually ignores interactions with the macroeconomy. At best, some of the theoretical and empirical analyses for urban and housing economics include macroeconomic variables (such as the inflation, the economic growth, GDP, the unemployment rate, etc.) as exogenous “control variables.” For instance, in the 4 volumes of Handbook of Regional and Urban Economics,2 the papers by Charles Becker and Andrew Morrison on “Urbanization in Transforming Economies” and Stephen Malpezzi on “Economic Analysis of Housing Markets in Developing and Transition Economies” attempt to relate the interaction between the macroeconomy and the housing markets.3 The adjacent field, Finance, borders on both macroeconomy and real estate housing in a much more responsive fashion. In Handbook of the Economics of Finance, Vols 1A-B, edited by G. Constantinides, M. Harris and R. Stulz, there are at least two macro oriented papers, “ConsumptionTobin includes several papers related to portfolio choices under uncertainty, and housing is arguably one of many different assets to hold. 2 Volume 1 is edited by Peter Nijkamp, Volume 2 is edited by Edwin Mills, Volume 3 is jointly edited by Paul Cheshire and Edwin Mills and Volume 4 is jointly edited by V. Henderson and J. F. Thisse. 3 There is a literature on whether real estate and/or real estate securities can be a hedge of inflation. However, it is mainly related to the portfolio choice rather than housing market behavior itself.
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based asset pricing” by John Campbell and “The Equity Premium in Retrospect” by Rajinish Mehra and Edward Prescott. In addition, there are several chapters which take “macroeconomic” seriously.4 In light of this comparison with finance, it is indeed shocking that there has been so little overlap and interaction between the macroeconomics and the housing literatures. More recently, however, there is a small yet growing research effort that strives to bridge the gap between the two literatures and shed light on issues that are jointly consequential to macro and housing economists. This paper will review selectively and highlight the new directions of this joint research. This paper is organized into six subsequent sub-sections. The next section will provide underlying motivations for the “macro-housing” literature. It will be followed by a discussion about the important ways in which macroeconomics and housing economics overlap, with a brief summary of the existing research. Section 3 will examine the interplay of
They include the chapters on “Financial intermediation” by Gary Gorton and Andrew Winton, “Intertemporal asset pricing theory” by Darrell Duffie, “Tests of multi-factor models, volatility, and portfolio performance” by Wayne Ferson, “Are financial assets priced locally or globally?” by G. A. Karolyi and Rene Stulz, “Finance, optimization, and the irreducibly irrational component of human behavior,” by Robert Shiller, “Fixed income pricing” by Qiang Dai and Ken Singleton, among others. 5 According to Chetty and Szeidl (2004), the mean expenditure share for shelter (i.e. housing) is about 20%, household income, supplies and furniture is about 6%, transport (including gas and maintenance) is 16%, food and apparel each is 15%, utilities, fuels, and public services is 7%, health care is 6%, the rest are for education, entertainment, and miscellaneous items.
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The focal point of section 6 will be the micro-structure of housing markets and urban form.5 Greenwood and Hercowitz (1991) find that the value of the residential capital stock is larger than than that for business capital. and should be the scope of macro-housing research? These are fundamental issues that deserve a response. and vice versa? What is.economy. 2. housing is not just “another” consumption good.he plain response is housing is a large share of the overall macro. and thus potentially significant household 6 See also Skinner (1994). Why Macro-housing? How are the housing market and the macroeconomy intertwined? Is it important to include the housing market in macroeconomic analysis. and usually. Sections 4 and 5 will discuss the vibrant sub-fields of housing markets dynamics and cycles. Significant fluctuations in housing price would imply significant fluctuations in wealth. To illustrate the significance of the housing market in the macroeconomy. 5 . the annual market value of residential investment is larger than that for business capital investment.6 Clearly. here are stylized facts.housing taxation with the macroeconomy. The last section will conclude. Housing constitutes a significant share of household expenditure as well as total wealth.

S.1 Differential tax treatment on housing For instance. M/(PY) is equal to the reciprocal of the velocity of money. 1996b). the ratio of nominal monetary stock to the nominal GDP. There is a large diverse literature related to the housing and taxation. Many of these papers have been previously surveyed. 3.wealth effects. Even this branch of the literature is voluminous. 8 7 6 .8 3. including an explicit consideration of the government budget and the general equilibrium effects. See Cheung (2003). 9 See the Handbook of Public Economics series. the value of real balance for M1 and M2 in the U. Auerbach and M.9 We will restrict our attention to those research treaties which examine the aggregate effects of taxation and the housing market.S. are about 30% and 60% of the GDP. As a comparison. 1/V. Campbell and Cocco (2004). Quigley and Shiller (2001). Feldstein. edited by A. respectively. Case. and the discussion is therefore selectively developed. Notice that according to the quantity theory of money. residential property stock is approximately equal to the annual average GDP. see Skinner (1989. Housing and Taxation It is easy to anticipate that property taxation of housing can be an important component of governmental budgets because of its immobility and magnitude.7 Davis and Heathcote (2001) find that the market value of the U.

11 See Hamilton and Whalley (1985).14 More recent property tax research borrows sophisticated 10 See Ljungqvist and Sargent (2000) for an explanation why durable and immobile capital is more vulnerable to taxation. Goulder and Summers (1989).11 DiMasi (1987) solves a computable.12 Fullerton and Henderson (1989) also show that general equilibrium taxation induced distortions among industries are smaller than those across assets. Hendershott and Won (1992). and finds that eliminating the differential tax treatment on capital and land can lead to a significant social welfare gain. 1983) study how differential tax treatment on residential housing and business capital affects the equilibrium allocation of capital and investment returns. 14 For instance.10 Yet. the tax system seems to favor house ownership Hendershott and Hu (1981. in the United States. 12 For instance.13 Other general equilibrium models find that tax policies which favor the housing sector will cause a significantly negative impact on both the aggregate income and the housing sector.6% increase in tax revenue. as the policy distorts the accumulation of physical capital which is essential for goods production and economic growth. in one of the parameterization. Skinner (1996a). a view clearly not shared by others. 7 . 13 Yet they find that even the latter is below one percent of income. this change can lead to 6. spatial general equilibrium model.There are at least two predominant reasons why housing is taxed. it is difficult to avoid taxation of housing because of its durability and immobility. Second. First. the market value of housing stock is significant. see Goulder (1989). as in many countries. Cooley and Salyer (1987) for related analysis.

tax system. If the preferential tax treatment on housing is undesirable. Turnovsky and Okuyama (1994). that is. Future research should 15 Among others.analytical devices from the macroeconomics tool kit.17 Differential tax treatment on housing may be a tool to “internalize” the externality. Leung (1999). He concludes that the preferential tax treatment for residential property leads to a net welfare loss. There may be some positive externality of house ownership. 16 The literature on time-consistent policy is too large to be reviewed here. 8 . 17 For instance. then. why has it been implemented? There are some obvious candidate explanations. housing may be a politically expedient tax target.16 Hansson and Stuart (1989) demonstrate such a time-inconsistency by showing that under certain conditions. of the current housing taxation research is focused on the U. if not all. Most.Casual observation suggests that the preferential tax treatment for housing exists in other countries. calibrated for both the aggregate statistics and the income distribution of the U. First.S. In a similar fashion. short term elected democratic governments may not be able to commit to long term policy. Interested readers may consult Ljungqvist and Sargent (2000) for a textbook treatment. see Glaeser and Sacerdote (2000). Lin and Zhang (1998). multiperiod overlapping-generation model. house ownership has significant social benefit. while taxing the capital stock. government would subsidize investment flows.15 Gervais (2002) develops preferential tax treatment in a dynamic general equilibrium. see Nielsen and Sorensen (1994).S.

in the U.K. 4. or the political system? Can different treatments be Pareto ranked? Currently.S. We will examine both 9 . Ortalo-Magne and Rady (1998) find that. It would be interesting to explain these movements in the housing market. which is in turn more volatile than GDP. the standard deviation of residential investment is more than twice that of non-residential counterpart. are the difference related to some economic indicators.address differences in the preferential tax treatment across countries? If so. such as the demographic structure. financial development. and U. the degree of economic development..S. although all three variables are correlated. the literature lacks both empirical and theoretical research about the effects of international differences of property taxation upon the macroeconomy. Davis and Heathcote (2001) show that.. Housing and business cycles The housing market endures significant cyclical movements and volatility. the number of housing market transactions is more volatile than the aggregate housing price. For example. for the U. and to what extent they are related to macroeconomic movement in business cycles.

whereas the non-residential investment lags the cycle. Jud and Winkler (2002) conclude that real housing price appreciation is strongly influenced by the growth of population and real changes in income. a change in government purchases has little. see Baffoe-Bonnie (1998). Wen (2001) for the case of U. Seko (2003) for the case of Japan.K.18 4.. In a model with 18 See Cooley (1995). The comovement of the housing market and the macroeconomy has been documented for several countries.1 Quantity Comovement An important portion of housing market movements is related to the business cycles. Davis and Heathcote (2001) find that.20 However. Ito (1993).S. 19 For instance. the residential investment leads the cycle (or GDP). if any. in the U. without a residential housing stock. For instance.S.. 20 See also Case (2000). effect on the capital stock adjustment in a small open economy model. it is not a trivial task to create a unifying theory of the business and the housing cycles. especially chapter 1. for a detailed discussion of why the quantitative implications of a theory are as important as the qualitative counterpart.. 10 . Bowen (1994) for the case of U.qualitative and quantitative aspects of the housing-business cycle relationship. The macroeconomy and the housing market are indeed interrelated and co-determined. the dynamics of residential investment are fundamentally different from the non-residential counterpart. Green (1997). As shown by Matsuyama (1990). construction costs and interest rates. See also Hwang and Quigley (2004).19 For city level data.

and so forth.23 21 For related analysis. since housing is a normal good. the productivity shock to home production cannot be measured even in principle. see also Benhabib. Rogerson and Wright (1991). 22 A typical story is that both home production and market production sectors can take advantage of the modern microwave oven in the cooking process.” 11 .S.21 They assume reversibility between residential and business capital. The productivity shocks to home production (such as home cooking.22 These assumptions enable Greenwood and Hercowitz to reproduce the co-movement of business and residential investment in the macro model. the stock accumulation will be affected by a change in government purchases. They intentionally suppress the “price dynamics” in order to focus on the “quantity dynamics”. who focus on the allocation of market versus non-market time. Thus. and neither priced nor recorded. Greenwood and Hercowitz (1991) and Baxter (1996) build a set of dynamic general equilibrium models to reproduce jointly the business and the residential investment cycles observed in the U. It follows that the theory cannot be easily “tested.residential property. which implies that the relative price of housing will always be unity. which is not traded in the market) and market production (such as food served in the restaurant) are assumed to be the same (or highly correlated). To overcome this difficulty. while Greenwood and Hercowitz (1991) focus on the allocation of market versus non-market capital. The crucial assumption that the productivity shock in both the market and home sectors is highly correlated cannot be easily tested. 23 “Output” of home production is not traded in the market. and washing machines with “micro-computers” installed in the laundry process.

and if consumer durables and time are substitutes in home production. 25 It is well known that the supply of housing adjusts slowly to price changes. thereby creating an observed comovement. see Hanushek and Quigley (1979. Fisher (2001) observes that the effectiveness of 24 In other words. The existence of convex adjustment cost encourages agents to “spread” the accumulation between business and residential investment. an increase in residential investment during the current period will release more labor hours for goods production in subsequent time periods resulting in a higher level of business investment in the current period. business and residential investment both increase. 1980). Chang (2000) shows that if there is an adjustment cost in capital accumulation. both effects reinforce each other and lead to the investment comovement. Thus. or simply buying a big home. from human capital accumulation to market goods and home production. Fisher (1997) explains residential and nonresidential investment comovement by assuming complementarity between the household and business capital in goods production. In an endogenous growth framework. For instance. 12 . Consequently.24 then the business and residential investment will co-move in the equilibrium. Einarsson and Marquis (1997) show that a positive productivity shock in production leads to time re-allocation. but the process of generating utility from consumer durables (including housing).As an alternative. home production is not just the purchase of durable goods (home).25 With substitutability between time and consumer durable in home production.

e. In sum. Their model obtains significant improvement in terms of fitting the data. Gomme. national data.2 Property prices.28 In 26 For instance. In equilibrium. there are several theoretical explanations for the residential and non-residential investment comovement. 2003b) for the analysis of the English experience.S. and the quantitative modeling is relatively satisfactory. Lane (2001) for more discussion. Kydland and Rupert (2001) allow for time-to-built stock accumulation (i. data. 13 . agents would naturally invest in both business and residential capital.market labor hours is positively related to the quantity and quality of household capital. respectively. For instance. investment comovement will be observed.S. generating higher levels of business capital and effective market labor hours. the time horizon for goods production and stock accumulation differ) and calibrate the model to emulate the U. find that the correlation between the residential property price and the real output is 0. a more comfortable home can make the sleeping time more “efficient” and lead to higher “productivity.26 Predicated on this assumption.27 Davis and Heathcote (2001) employing the U. 28 See Ortalo-Magne and Rady (1998. see Stockman and Tesar (1995). 4. general equilibrium models.53 and statistically significant. collateral and related issues Existing research has not been successful for explaining the price dynamics of the housing market..” 27 This seems to be true for a very large class of dynamic.

Driffill and Sola (1998) demonstrate that bubbles and switching processes are not easily distinguished. it is also difficult to establish the existence of bubbles. Montrucchio and Privileggi (2001). and local city data are remarkably different.30 Empirically.1475. Santos and Woodford (1997).29 Quantitative analysis of the property prices frequently are found to be less than satisfactory. cities is 0. (The average correlation between commercial property and real output is similar. Chen (2001a) finds that a rational bubble model is unable to explain the movements in stock prices 29 30 See Wang (2003) for a review of the related literature. find that the average correlation between residential property price and the real output for about 50 major U. Kan. A satisfactory joint explanation awaits future research with a unifying theory. An often-cited reason for failure of theory and reality is the existence of “housing price bubble”.1346.S. An obvious explanation for this discrepancy is that there is important reallocation of consumption as well as production activities across cities over the business cycles.S.contrast. the magnitudes for aggregate U. Yet the recent researche finds that the “bubble” is not an attractive explanation. For instance. the conditions for the existence of bubbles are very fragile. among others.) Though they are still statistically significant. 14 . 0. show that for discrete time models with rational agents. Kwong and Leung (2003) using city data. See Loewenstein and Willard (2000) for the case of continuous trading.

32 Their work is built around the variable severity of 31 32 See Hamilton and Whiteman (1985) for discussion on rational expectation and econometrics.and property prices in Taiwan. researchers either may need to either reject the rational expectation hypothesis. see Li and Yao (2005) (dynamic partial equilibrium model) and Chambers. Venti and Wise (1984. 2004) for alternative approaches. see Skinner (1989).31 Another alleged explanation for housing price cyclicality and volatility is the structure of the residential lending market. 1989). 15 . Garriga and Schlagenhauf (2005) (dynamic general equilibrium). For earlier related contributions. overlappinggenerations model. or proffer an alternative explanation. See also Ben-Shahar (1998. For more elaborate models. Ortalo-Magne and Rady (1998) are perhaps the first to differentiate residential housing from other kinds of capital in a dynamic general equilibrium. Thus. Sheiner and Weil (1992).

even a temporary income shock can generate very rich dynamics in such an endowment economy. Ortalo-Magne and Rady (1998.collateral constraints over the life cycle. See also Ortalo-Magne and Rady (2002a. Cossa and Krupka (2001) provide evidence that many young parents have little net worth.34 The case of “middle-aged” households is subtle. The significant interactions between the collateral value and the aggregate economic activities are also confirmed by a number of case studies for 33 See Bardhan et. 2003a.. homeowners. demographic change. Some of the middle group may be waiting for the opportunity to “tradeup”. b). 36 As a matter of fact. and would possibly exchange for small units (i. 34 See Davidoff (2004) for evidence that the elders indeed de-accumulate the housing stock by reducing maintenance. young agents do not own houses and an increase in the housing price would make it more difficult for them to buy. (2003) for the case of Singapore. 1999. al. In contrast. These theoretical analyses are buttressed by empirical research.e. which is consistent with the prediction of OrtaloMagne and Rady’s model. 35 Lusardi.33 For instance. Thus.35 Other “middle aged” households may have already “moved up”. (old agents) benefit from housing prices increases through capital gain without altering their housing demand (or supply). 16 . Ortalo-Magne and Rady (1998) find that the price of “houses” (large units) relative to “flats” (small units) vary systematically over the business cycle. trade down) to increase their available financial wealth for retirement consumption. income distribution changes and aggregate economic activity.36 housing transactions. b) extend this framework to explain the interactive dynamics among housing prices.

40 Chetty and Szeidl (2004). see Burnside. Edelstein and Lum (2003) for Singapore. unanticipated economic shock the (“lock-in” effect). show a clear interrelationship between and among real estate collateral values and aggregate economic activity. Eichenbaum and Rebelo (2001) and the references therein.38 The collateral role of housing may have important implications for asset pricing.37 Black. 39 Berkovec and Fullerton (1989. Seko (2003) for Japan. Ho and Wong (2003). Among others. and Kim (2003) for the case of Korea. Lau and Leong (2002). Liu and Shen (2003) for China. a 10% rise in net housing equity would increase the number of new businesses by 5%. Leung and Feng (2003) for Hong Kong. Cocco. 40 See Davidoff (2003) for empirical evidence. 1992) build general equilibrium models for the housing and portfolio choice.residential price cycles. Using micro data for Japan. For instance.” Mera and Renaud (2000). Leung.39 Those households with significant mortgage debt may need to adjust non-durable consumption when confronted by a negative. Ortalo-Magne and Rady (2003a) for England. Gan (2003) confirms the intuition that losses in collateral value significantly reduce investments. Flavin and Nakagawa (2004). and forces firms to rely more upon internal funds to finance investment. de Meza and Jeffreys (1996) find that for the United Kingdom. Gomes and Maenhout (2002). 38 There are alternative theories for financial crises. 37 17 . see Chen and Wang (2003) for the case of Taiwan. Collateral is recognized as playing an important role as a determinant for “financial crises.

S. and are independent of the business cycle in the United Kingdom. 18 . Kwok (2003). Adelman (1965) claims that “long cycles” do not exist. Ball. Piazzesi. Ball. 1999). Klotz and Neal (1973) verify the existence of “long cycles” with spectral and cross-spectral analysis. among others. Morrison and Wood (1996. Wheaton (1987) finds that the cycles of office vacancy and office development in the U. However. discover significant long cycles of new construction. 5. Employing the Kalman Filter technique and cross-country data. with periodicity of 20-30 years (so-called “Kuznets cycles”) in both residential and non-residential real estate markets. “Long Cycles” in Housing Empirical research repeatedly documents “long cycles” in the real property market. Schneider and Tuzel (2003). See Kelley (1969) for a literature review. Piazzesi and Schneider (2004).41 41 There is a large literature on “long swings” or “long cycles” or “Kuznets cycles”. are approximately 10 years. develop models that demonstrate that collateral and portfolio effects are closely interrelated and affect asset price volatility. Lizieri and MacGregor (1998) show that new commercial property cycles have a duration of 10 years. For instance.Gomes and Michaelides (2004).

The periodicity of housing cycles may be significantly longer than typical business cycles.42 and local. All these empirical regularities demand an explanation and the next section will provide a quick review on that. al. National building cycles are similar. in the Gottlieb micro data. See also Dokko et. vacancy rates in different communities at different time periods are similar. .The NBER monograph by Gottlieb (1976). regional and national cycles typically move together. Gottlieb. (1999) for more discussion.4 years. Vacancy rates also display dramatic cyclical movements. Interestingly. and a mean standard deviation of 5. is perhaps the most systematic analysis of the cycles in the real property market. 42 43 The mean periodicity is 19. investigating more than 100 real estate related time series from different cities in different countries.finds that local building cycles exhibit the mean periodicity of 19.0 years and a mean deviation is 4. This general finding can be traced back to Conklin (1935). 19 .7 years. Derksen (1940). They tend to “lead” the new building cycle. Adopting the Burns and Mitchell methodology. and amplitudes are larger than those of the business cycle.0 years.

For instance. However. The changes of new buildings seem to be much more in line with the change in supply and vacancy than changes in cost. Also. For the United States.1960. Once the real estate development project starts. strategic activities among real estate developers. it is costly to terminate or to reverse.1950. 44 See also Wickens (1941).43 Therefore. the value of a development is not independent of other developments nearby. 20 . Campbell (1963) shows that it is the “swings” or “cycles” in population that lead to “swings” in housing starts from 1890. since the landowner can always leave the land idle for the current period and develop it later. it has been suggested that the change of construction costs over time leads to the fluctuations of new building. this explanation is not consistent with the evidence.5. and finds that the changes in population. Why building cycles exist? Why does new building displays dramatic cyclical behavior? Many explanations have been proposed.44 An alternative explanation for real estate cycles hinges upon the. Lewis (1965) examines housing cycles between 1700.1. and shocks (such as wars and natural disasters) are the driving forces behind cycles. credit. The decision for constructing new buildings is an option. the question is: what changes the supply and vacancy? For England.

Lai. Much remains to be devised to reconcile the “strategic theory of cycles” with the empirical realities of long housing cycles. Early attempts to model this complex behavior have been conducted by. among others.”46 Fundamental research on the relationship between city for and structure and housing is needed for several reasons. 5. the world is becoming more urban. Wang and Zhou (2004). among others. First. Arnott and Small (1998). 21 . Lai (2003). Wang et. Much of housing market fluctuations may 45 46 See also Downing and Wallace (2002a.2 City and housing This section will discuss briefly the relationship between the urban city and the housing market. (2000). which is reviewed by Wang (2003). surveyed by Anas. the city is “a spatial concentration of a large number of people. There is a large literature on agglomeration. among others. and the need for pioneering research. For some recent development on the structure of cities. RossiHansberg (2004).45 These models are technically involved and partial equilibrium in nature. combining the option feature of real estate development with the strategic interactions of different developers is a difficult task. see Lucas (2001). Lucas and Rossi-Hansberg (2002). There is a related literature on the spatial structure of cities. al. The fundamental characteristic of a city is its density.Clearly. According to Bogart (1998). b). Wang and Zhou (2000). there is an increasing tendency for both population and economic activities to concentrate in cities.

may have important impacts upon household 47 For instance. If this were the case. see Chatterjee (2003). Torto Wheaton Research (2002) presents evidence that the real price of housing in Amsterdam over the 300 years displays no trend. we would observe a relationship between the growth and decline of cities. 22 . businesses and households move to other cities. the correlation between housing prices and city output is much lower than that for the national economy. has yet to be irrefutably and scientifically established. Rossi-Hansberg and Wright (2004). suggesting that there may be significant reallocations of economic activities and resource (including both capital and labor) across cities over time. and the relative housing prices across cities may have changed significantly as well. and housing prices. Alternatively. understanding urban city fluctuations may enhance our understanding of the relationship between the macroeconomy and the housing market.47 Thus. Third. Perhaps when the Amsterdam real housing price rises above a certain threshold. some cities “substitute” for other cities. such as the neighborhood effects. although it has experienced dramatic volatility. Second. This conjecture.actually emanate from fluctuations in urban areas. the micro-structure and non-market interactions. though often mentioned in the media.

5.48 How “non-market interactions” interact with the aggregate economic activities is an under-explored economic phenomena. Among these. and housing markets and urban structure. Glaeser and Kahn (2003). two questions deserve special highlighting. Glaeser and Gyourko (2001). Edelstein and Leung (2003). How will the housing market change in the era of globalization and financial integration?49 Second. the impacts of collateral upon housing and its “long cycles” for the housing market. There are many other interesting research topics about the nexus of the macroeconomics and housing. 23 .ownership behavior. Bardhan. 49 For instance. vacancy. etc. It examines the relationship between and among housing and taxation. and Ioannides (2003).) may be explained better by aggregating micro-behavior within cities. Perhaps macro-housing market fluctuations (prices. see Leung (2001). 50 See Jeske and Krueger (2004).3 New research frontiers for the macro-housing nexus This paper selectively reviews the existing literature about the nexus of the the macroeconomy and the housing market. Glaeser and Scheinkman (2003). see Glaeser (2000). how will housing market performance and the housing-macro finance system and capital markets change in the 48 Among others. Ioannides and Zabel (2000). Bardhan. new building. housing cycles and business cycles. Edelstein and Tsang (2004) for some preliminary attempts.

24 . especially in developing economies? How has the integration of the housing finance system changed the risk-sharing across the economy?50 Both of these issues deserve special research attention in the future.future.

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