What Became of the Building Cycle?

Abstract

This chapter describes building cycles, Kuznets cycles, and business cycles and discusses the housing model. The concept of a long building cycle figures prominently in the pre-World War II literature on economic fluctuations. The contraction phases of these long cycles consisted of prolonged and deep declines in the absolute level of new building construction. The long cycles were dominated by residential construction, but other types of building participated as well. Wardwell and Kuznets established the existence of secondary secular movements in detrended production and price series that had been smoothed to attenuate the influence of business cycles, and Burns showed that the existence of such trend-cycles was so widespread among individual industries as to strongly suggest the existence of long swings in the growth rate of aggregate economic activity. The long swings in building activity and economic growth are closely related historically. The average duration of each is about 17–18 years, they are in one-to-one correspondence, and they bear a similar relationship to ordinary business cycles. The housing model consists of four behavioral equations and five identities. The first two behavioral equations relate to the demand and supply for the total stock of dwelling units in the economy and together determine the level of rent and the number of households or occupied dwelling units. The second pair of behavioral functions is concerned with the construction of new dwelling units. One of them is a builder's production decision equation to determine the number of new private dwelling units started, whereas the other predicts the value of construction per new start. The various identities serve to relate the number and value of new housing starts to the stock of dwelling units and its value in constant dollars.