This paper analyses housing costs and changing patterns of residential development over the long term in a dynamic general equilibrium. It makes four main points. First, when agglomeration matters the speed of travel improvements is crucial. We derive an intuitive condition for the rate of change in transport efficiency that generates at land and house prices on a balanced growth path. Second, we present evidence that this condition seems to have been approximately satisfied in many developed economies between the mid-nineteenth century and the mid-twentieth century, but that since then passenger transport improvements have slowed down. Once that happens we move o¤ the balanced growth path. Our calibrated model suggests this has been the crucial factor behind rising housing costs in many countries in recent decades. Third, we show how significant cross-country variation could be due to land availability and planning restrictions; though planning restrictions tend to have less impact. Finally, we show that speed of increase in house prices is extremely sensitive to two parameters -the elasticity of substitution between land and structure in creating housing services and substitutability between housing and consumption goods in utility. We nd that in many countries with slowing improvements in transport it is plausible that house prices could now persistently rise faster than incomes.

This paper aims to uncover the drivers of house and land prices -and of patterns of residential development -over the long term. It makes four connected points. First, when agglomeration matters, so that there are benefits to central location, the evolution of commuting costs is crucial to the determination of land and house prices. We derive a condition for the rate of change in transport efficiency that generates at land and house prices. Along this balanced growth path, the improvements in transport efficiency make it profitable to develop less accessible land, and this increase in land supply the increase in demand due to population and income growth. We present evidence that this condition seems to have been approximately satisficed in many developed economies between the mid-nineteenth century and the mid-twentieth century. However, since then passenger transport improvements have slowed down. Our second point is that by accounting for this slow down our model can account for the general path of house prices in many developed economies over the last 150 years; nearly 75-80 years of at land and house prices, with house prices then rising gently for another 40 years before rising more rapidly from a few decades ago. Third, we show how this general pattern for house prices is affected by either a shortage of undeveloped land or by planning restrictions. Differences in these dimensions can account for the idiosyncratic variation seen across countries in the general path for house prices. Finally, we show that when the economy is not on a balanced growth path, the evolution of home prices is greatly sensitive to two elasticities: the elasticity of substitution between land and structures in producing housing; and the elasticity of substitution between consumer goods and housing in utility. We develop a calibrated, general equilibrium model to illustrate these points and also use it to consider the path of home prices over the next one hundred years.