Investment in Residential Construction

Abstract

Over the last three decades, investment in residential construction has been subject to marked cycles in many industrialized countries. There are two arguments in favour of anticyclical monetary or fiscal policies. First, it has been argued that the cycles in housing construction tend to destabilize the economy, while creating inefficiencies in the housing construction industry by forcing temporary suspension of inputs such as labor and construction equipment. Secondly, cyclicality presumably causes higher housing costs and therefore raises questions of consumer welfare and equity. In addition, there is some empirical evidence to support the view that investment in residential construction is a leading indicator of the business cycle, and that monetary impulses are transmitted to housing construction first. Apart from the disequilibrium estimation, the emphasis of this chapter is on the question of whether monetary impulses are indeed transmitted to investment spending through interest rates as well as through interest rate and inflation expectations.KeywordsInflation RateExcess DemandSupply FunctionRental HousingMortgage RateThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.