Housing, land prices, and growth

We consider the effects of land for housing on the growth process within an overlapping generations model. Our original interest was to enquire whethe r the introduction of land into a growth model might account for a "virtuou s'' circle in which saving-up for land (or housing) generates growth and hi gher land prices, generating further increases in saving, and so on. Such a n account is sometimes proposed for high saving rates in East Asia, where m ortgage markets are limited or absent. Our analysis does not support such a story. The user cost of land reduces the resources available for consumpti on of reproducible goods, so that the introduction of intrinsically valuabl e land into a growth model lowers the equilibrium stock of capital and rais es the equilibrium interest rate. On the asset side, the presence of land c auses life-cycle savings to be reallocated away from productive capital tow ards land. The social optimum in such a model is for land to be nationalize d and provided at zero rent. Land markets, far from generating saving and g rowth, are inimical to capital formation.