Productivity and House Prices

In Bubble Poppers, I followed Peter Garber in arguing that claims about ‘bubbles’ in asset prices are a substitute for fundamental analysis, a non-explanation for events that people are otherwise unable or too lazy to explain.  In contrast to the dominant non-explanation for innovations in house prices in the United States, James Kahn argues that there is a strong relationship between house prices and productivity growth that explains the recent US housing boom and bust:

The housing boom and bust of the last decade, often attributed to “bubbles” and credit market irregularities, may owe much to shifts in economic fundamentals. A resurgence in productivity that began in the mid-1990s contributed to a sense of optimism about future income that likely encouraged many consumers to pay high prices for housing. The optimism continued until 2007, when accumulating evidence of a slowdown in productivity helped dash expectations of further income growth and stifle the boom in residential real estate.

posted on 10 July 2009 by skirchner in Economics, Financial Markets, House Prices

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