Why is residential investment procyclical? What will be an ideal resp

Why is residential investment procyclical?

What will be an ideal response?

ANSWER

Cyclical fluctuations of income and expected income dominate the demand for housing. The user cost of housing is composed of procyclical elements — the real interest rate and the relative price of housing — which would counter the cyclicality of residential investment. But these cost determinants (as well as the procyclical cost of construction) are overwhelmed by expected changes in the relative price of housing. Residential investment is neither deterred by a boom nor revived during a slump. Rather, it thrives during a boom and languishes until the slump has passed.