Does TFP drive Housing Prices? A Growth Accounting Exercise for Four Countries

In this paper we investigate the role of technological differences between the construction sector and the general economy in the evolution of real housing prices. In particular we ask whether the recent soar in housing prices across countries reflects the different trends of total factor productivity (TFP) in the construction sector versus the other sectors. To do this, we first compare housing and construction prices in the U.S., the U.K., Germany and Spain. We find that the two prices follow a similar pattern before 1997 and diverge afterwards in all countries. Second, we perform a growth accounting exercise to measure the contribution of relative TFP on the price of construction relative to GDP for the four countries. We find evidence of a strong positive contribution of relative TFP to construction prices in the case of the United States and Germany. Instead, in the case of Spain and the U.K., relative TFP has contributed negatively to the evolution of construction prices, which have grown due to the dynamics of wages and capital returns. We conclude that in these two countries, market conditions, rather than technological factors, have been the main culprits of the recent soar in housing prices.