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 ho use prices over the period to 2007 is based on a serious misinterpreta tion of their demand variable. In a time-series context this variable, which comes from a cross-section regression of house values against t he age of occupants, is a measure of the adult population, not the dem and for housing services or the stock of houses. Econometric work sugg ests that in addition to adult population, real income, relative price s and real interest rates are important factors determining the aggreg ate demand for housing. To be credible, forecasts of house prices need to integrate information on demand with information on cost factors a nd the supply of new houses.