House Price Dynamics: The Role of Tax Policy and Demography

HOUSE PRICES have recently attracted unusual attention because for the first time in decades large areas in the United States have experienced declining nominal house prices. Such house price declines are not un-precedented. Between 1929 and 1933, nominal house prices declined nearly 25 percent, although there was virtually no real decline.1 And more recently, in the early 1980s, the prices of homes in oil-producing regions fell. In Canada, too, cities such as Vancouver have experienced sharp price declines following rapid increases. These episodes have not been widespread enough, however, to dislodge the view that housing is a solid long-term investment. This view is largely based on the experi-ence of the 1970s, when house price inflation outpaced overall price in-creases by almost 30 percent. Declining real houses prices are not so unusual. For the nation as a whole, real house prices have trended down since the fourth quarter of 1979. Just before the October 1987 stock market crash, real prices were 2.3 percent lower than their 1979 levels. By the second quarter of 1991, real prices had declined another 5.6 percent, with substantially greater real declines in the Northeast and some parts of California. In the New York City metropolitan area, for example, real prices have declined 24