A FALL IN CONSTRUCTION COSTS CAN RAISE HOUSING RENTS

In all familiar housing market models, a drop in construction costs expands the housing stock and lowers rent. This letter presents an alternative model in which a fall in construction costs can raise housing rents. The mechanism is as follows. A fall in construction costs relative to maintenance costs shortens building life; with fixed land and fixed lag between demolition and reconstruction, built-up land drops and with fixed density, housing stock drops too. This paradoxical result points to the potential importance of incorporating land into housing models.