How might house prices affect workers’ productivity in OECD economies?

Higher house prices may be partly to blame for the sluggish growth of labour productivity in the OECD countries in recent decades. The adverse impact seems to be less severe in more complex economies – those that produce a greater diversity of products based on specialised know-how.

Increasing the productivity of a workforce is crucial. It matters for the performance of the aggregate economy and it is a key driver of variations in living standards across countries (OECD, 2024).

But labour productivity growth has been sluggish in many advanced and emerging economies in recent decades (see Figure 1). As a result, turning this worrying trend around has been a central priority for the global development agenda (Colford, 2016).

Figure 1: Productivity growth of the global economy, advanced economies, and emerging market and developing economies

Source: Conference Board; Penn World Table; World Bank, World Development Indicators, available here.

Research suggests that the state of the housing market – including changes in house prices and housing investments – can affect productivity. In particular, rising house prices can have a negative effect on labour productivity (see Maclennan and Long, 2023; Dodson et al, 2017; Maclennan et al, 2015; Maclennan et al, 2018; Maclennan et al, 2021; Pawson et al, 2021).

These studies offer a theoretical explanation of the link between housing and productivity (which we have summarised below). But there is a lack of empirical, macro-level research examining the connection between house prices and the growth of labour productivity across OECD countries, spanning different periods.

One recent study seeks to address this gap using data from 24 developed OECD economies (Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Israel, Italy, Japan, Luxemburg, Netherlands, New Zealand, Norway, Portugal, South Korea, Spain, Sweden, Switzerland, the UK and the United States) from 1972 to 2019 (Gholipour et al, 2023). The study shows that there are significant variations in the relationship between house prices and labour productivity across the sampled countries, and that this is based on their levels of economic complexity.

Why has productivity growth in advanced economies slowed in recent decades?

Labour productivity growth has dropped sharply in most advanced economies since the late 1990s. The Covid-19 pandemic has accelerated this trend (Dieppe, 2020).

The overall slowdown has been attributed to various factors. These include ageing populations, increasingly stable educational attainment, limited expansion into more varied and complex methods of production, and the deceleration of reallocation within and between economic sectors. Shocks to productivity growth (such as the pandemic), slow adoption of information and communication technologies (ICT) and declining contribution from ICT-intensive sectors in the United States, and restrictive product market rules (for example, state control of business enterprises, or legal and administrative barriers to entrepreneurship) in some parts of Europe have also contributed (Dieppe, 2020).

Since the global financial crisis of 2007-09, a slowdown in ‘capital deepening’ has been the main driver of slow labour productivity growth in developed economies (Dieppe, 2020). This means that the amount of capital – machinery, computers, buildings and so on – per worker is not growing as quickly as it was before. This then acts as a drag on the growth of labour productivity.

How might house prices affect labour productivity?

The housing market, and changes within it such as increased house prices and investment in property, can influence labour productivity in both favourable and adverse ways. This could happen via at least three different pathways.

Capital allocation

First, elevated house prices might redirect capital investment towards property (typically regarded as low-productivity assets), diminishing available capital for labour in productive and innovative sectors.

At the same time, increased house prices can potentially enhance overall economic productivity by empowering potential entrepreneurs (with home ownership), enabling them to start new businesses. These ventures themselves often direct investments away from property and into other activities, fostering innovation in product development.

Mobility of workers

Second, elevated house prices and rents can potentially compel lower-income families to relocate further away from areas with significant job concentrations. This can weaken the effectiveness of labour market matching (getting the right people into the right jobs). This displacement may result in reduced labour productivity.

Formation and use of human capital

Finally, rising housing costs can divert households’ funds away from investment in education and training, both of which are key determinants of labour productivity. In addition, rising house prices (and growth in housing wealth due to higher house prices) can reduce labour participation and hours of work for homeowners (especially for older women and younger partnered people). This can lead to a reduction in labour supply and slower productivity growth (Atalay et al, 2016).

On the positive side, increases in house prices and higher mortgage indebtedness could lead people to work for longer, which could help to mitigate declining rates of employment and productivity slowdown due to population ageing (Cigdem-Bayram et al, 2017).

How can researchers measure the relationship between house prices and labour productivity?

Labour productivity is measured in terms of gross domestic product (GDP) at market prices per hour worked. It measures how efficiently labour input is combined with other factors of production (such as land, capital and entrepreneurship) and used in the production process (OECD, 2024).

The average of labour productivity growth rates in the OECD sample set out above is 2%, ranging from -7% in Greece to 21% in Ireland.

Other factors can affect the labour productivity growth rate beyond house prices. But some of these may also be correlated with both house prices and productivity growth, and are therefore important to consider.

These include annual changes in the level of globalisation, enrolment in tertiary education, gross capital formation (annual percentage growth in capital stock), participatory democracy index, property rights and working-age population.

To isolate the effect of house prices on workers’ productivity in our recent study, it is necessary to include the effects of these factors in our analysis. We also control for country-level characteristics such as culture, history, geography and climate, which may also affect labour productivity growth.

What does recent research show?

There is a significant and negative relationship between real house prices and labour productivity growth in the sample of OECD countries. So, higher house prices are associated with weaker growth in workers’ productivity across the 24 nations, from 1972 to 2019.

Specifically, if real house prices go up by 33 points on the index, this is linked to a decrease in labour productivity growth of about 0.6 percentage points.

This drop in productivity is roughly a quarter of what we typically see in changes in productivity rates between low and high growth rate countries. So, house price appreciation may well have led to impaired labour productivity in most developed countries.

Does economic complexity matter?

Economic complexity is a measure of the productive capabilities of a country. In our recent study, we split the sample into two categories based on their levels of complexity.

The first group includes nine economies that are highly complex and sophisticated (in descending order from the most complex economy): Japan, Germany, Switzerland, Sweden, Austria, Finland, the UK, the United States and South Korea. The remaining economies are in the second group.

These categorisations are based on the average scores on the Economic Complexity Index (ECI) between 1995 and 2021, developed by the Growth Lab at Harvard University (2019). The idea is that countries that are home to a great diversity of productive ‘know-how’ (particularly complex specialised knowledge) are able to produce a greater diversity of sophisticated products.

In highly complex economies, house prices will have a weaker effect on the growth of labour productivity compared with less complex ones. This is due to a lesser degree of capital reallocation from other sectors to the housing market during housing booms within more complex economies. As a result, this reduces the negative impact of a house price boom on productivity.

For example, in an economically diverse and complex nation like Germany, there are numerous investment opportunities across a wide range of sectors such as pharmaceuticals and ICT, providing diverse avenues for income generation. In contrast, in less complex economies, such as Australia, there are fewer investment opportunities. In such settings, property is the primary investment option for most households.

Research shows that there is a substantial and adverse effect of house prices on the growth of labour productivity in economies characterised by lower levels of economic sophistication (such as Australia and Greece). Conversely, although real house price increases do have a negative effect on labour productivity growth in the subset of highly economically complex countries, our research suggests that the result should be interpreted with caution (in the language of economics, the effect may not be ‘statistically significant’).

This study suggests that the correlation between house prices and labour productivity growth hinges on the complexity levels of respective economies. This underscores how important it is for policy-makers to consider the impact of housing market dynamics on labour productivity. A possible approach to mitigating the negative consequences of rising house prices on productivity involves moving towards being a more diversified and complex economy.

By enhancing the complexity and sophistication of the economic landscape, it is plausible to lessen the investment demand in housing markets (because other options are available for savers). This, in turn, could decelerate the growth of house prices, ultimately contributing to a positive effect on labour productivity.