DEMOGRAPHY AND THE DEMAND FOR HOUSING - A REINTERPRETATION OF THE MANKIW-WEIL DEMAND VARIABLE

This paper argues that the Mankiw-Weil forecast of a 47% decline in house prices over the period to 2007 is based on a serious misinterpretation of their demand variable. In a time-series context this variable, which comes from a cross-section regression of house values against the age of occupants, is a measure of the adult population, not the demand for housing services or the stock of houses. Econometric work suggests that in addition to adult population, real income, relative prices and real interest rates are important factors determining the aggregate demand for housing. To be credible, forecasts of house prices need to integrate information on demand with information on cost factors and the supply of new houses.