A forward-looking model of housing construction in the UK

Main points

• This paper identifies and juxtaposes different approaches to modelIing housing construction. The first two are based on dynamic marginal pricing considerations and emphasise adjustment costs and the necessary time to build, respectively. Importantly, both these models introduce some degree of forward-looking behaviour into the housebuilding decision. Both approaches are able to explain aspects of UK housing starts, 1970-90. Non-nested testing showed that the time-to-build story is more powerful in explaining the data set at hand. However, we have not been able to find any evidence in support of a third hypothesis, namely that quanity signals, proxied by turnover in the housing market, influence starts. The start to completion lag, in turn, is found to be affected by the interest rate representing the opportunity cost of delayed completions.