Housing has been one of the most essential services consumed by human beings and real estate has been a key store of wealth. Houses are a large proportion of household wealth, serve as a key collateral for bank lending and play a central role for long-run trends in wealth-to-income ratios and the size of the financial sector. Fluctuations in housing prices, their impact on balance sheets of consumers and banks, as well as the deleveraging process caused by house price busts have been a major focus of macroeconomic research in recent years. How have house prices evolved over the long run and what can we learn from history?

A wide body of literature has looked into house price evolution for different countries and time periods. Based on extensive historical research, Knoll, Schularick and Steger (2017) present house price indices for 14 advanced economies since 1870. The authors show that house prices in most industrial economies were largely constant in real (CPI-deflated terms). By the 1960s they were on average not much higher than they were on the eve of World War 1. They have been on a long and pronounced ascent since then, giving rise to a hockey-stick pattern of house prices in the long run. The authors also study the driving forces of this hockey-stick pattern of house prices. Land prices are the key to understanding the trajectory of house prices, explaining 80% of the global house price boom that has taken place since World War II.

Hedonic pricing models offer another approach to analysing housing prices. Hedonic pricing models decompose housing expenditure into measurable prices and quantities, so that rents for different dwellings or for identical dwellings in different places can be predicted and compared. Hedonic regression models offer a way to examine how different housing characteristics are priced in the overall house price. Drelichman and Agudo (2014) reconstruct housing costs for properties belonging to the Cathedral Chapter of Toledo between 1489-1600 using detailed data on location and property size, to trace the effects of exogenous shocks on the rental market using hedonic techniques. In a similar vein, Karagedikli and Tunçer (2020) estimate real hedonic house prices and urban wealth inequality in the housing market of Edirne, a major city of the Ottoman Empire from 1720-1814. Results show that house size, proximity to the commercial centre, access to fresh water and family ties were important determinants of relative house prices. 

Given the importance of house prices in understanding currents in the housing market, what are some implications of fluctuations in housing markets? Housing indicators lead business cycles in most countries, and show that the leading relationship is more prominent in the long run (Huang et a., 2020). Research has shown that investment reacts more strongly to housing price shocks than fluctuations to consumption and output. Overall, post-Global Financial Crisis of 2007-8, the understanding of macro-financial linkages of housing with the business cycle has garnered special interest. The Global Financial Crisis was a reminder that financial factors play an important role in shaping the business cycle and there is a growing need for more realistic models that effectively capture the interactions between the real and financial sector. In this regard, housing appears to be an important driver of cyclical fluctuations. To conclude, history provides lessons that globally, housing plays a critical part of the business cycle of most countries. Moreover, understanding land prices is important as they crucially influence the trajectory of housing prices.