House price fluctuations take centre stage in recent macroeconomic debates, but little is known about their long-run evolution. This column presents new house price indices for 14 advanced economies since 1870. Real house prices display a pronounced hockey-stick pattern over the past 140 years. They stayed constant from the 19th to the mid-20th century, but rose strongly in the second half of the 20th century. Sharply increasing land prices, not construction costs, were the key driver of this trend.
The (unweighted) mean and median of the 14 house price indices:
Well. The authors conclude that "sharply increasing land prices, not construction costs, were the key driver of this trend." OK, but which factor made the land prices soaring?
The answer is here. It's banking booms which keeps driving property prices upwards:
It makes perfect sense:
- There was a credit boom starting by 1870 and peaking before the Great War. Property prices rose accordingly.
- The era from 1914 to 1945 was bad for mortgages and bank lending in general for obvious reasons.
- There has been a secular credit boom and a property boom since the 1950's; it was briefly interrupted by the notorious financial crisis in 2007.
- However, the financial crisis of 2007 (or 2008 in some countries) made just a dent into the long term trend line.
- In short, credit boom => house price boom.