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The Binding Credit Constraints and the Welfare Effects of Housing Price Appreciation

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  • Ashot Tsharakyan
  • Martin Janíčko
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    Abstract

    The paper deals with some relevant effects of appreciation of housing prices on social and aggregate welfare. As it has been found difficult to assess the current situation given the housing market being the most affected by the crisis, earlier data from 1995 to 2006 have been used. It generalizes previously available results by considering credit constraints together with endogeneity of housing prices. First, housing price appreciation implies improvement in aggregate welfare in a model with exogenous housing price and credit constraints. Then, housing price is endogenized by modelling the supply side of the housing market. In this model, housing price appreciation is caused by supply and demand shocks. The supply shock originates from a change in building permit cost. The demand shifts are generated by changes in household income and interest rates. Both credit-constrained and unconstrained versions of this model are considered. Finally, the combination of observed demand and supply shocks is used to quantify aggregate welfare effects on the US housing market. The results demonstrate that demand shocks dominated during that period and the aggregate welfare improved as a result of housing price appreciation.

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    Bibliographic Info

    Article provided by University of Economics, Prague in its journal Prague Economic Papers.

    Volume (Year): 2010 (2010)
    Issue (Month): 4 ()
    Pages: 359-382

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    Handle: RePEc:prg:jnlpep:v:2010:y:2010:i:4:id:382:p:359-382

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    Related research

    Keywords: social welfare; housing price appreciation; endogenous housing price; demand and supply side shocks; binding credit constraints; aggregate welfare;

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    References

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    1. Bacchetta, Philippe & Aghion, Philippe & Banerjee, Abhijit, 2004. "Financial Development and the Instability of Open Economies," Scholarly Articles 4554209, Harvard University Department of Economics.
    2. Bajari, Patrick & Benkard, C. Lanier & Krainer, John, 2004. "House Prices and Consumer Welfare," Research Papers 1840, Stanford University, Graduate School of Business.
    3. Enrique G. Mendoza & Ceyhun Bora Durdu, 2004. "Putting the Brakes on Sudden Stops: The Financial Frictions-Moral Hazard Tradeoff of Asset Price Guarantees," NBER Working Papers 10790, National Bureau of Economic Research, Inc.
    4. Edward L. Glaeser & Joseph Gyourko & Raven E. Saks, 2005. "Why Have Housing Prices Gone Up?," American Economic Review, American Economic Association, vol. 95(2), pages 329-333, May.
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    7. Matteo Iacoviello & Raoul Minetti, 2002. "Financial Liberalisation and the Sensitivity of House Prices to Monetary Policy: Theory and Evidence," Boston College Working Papers in Economics 538, Boston College Department of Economics.
    8. Wenli Li & Rui Yao, 2005. "The life-cycle effects of house price changes," Working Papers 05-7, Federal Reserve Bank of Philadelphia.
    9. Kostas Tsatsaronis & Haibin Zhu, 2004. "What drives housing price dynamics: cross-country evidence," BIS Quarterly Review, Bank for International Settlements, March.
    10. Matteo Iacoviello, 2004. "Consumption, House Prices and Collateral Constraints: a Structural Econometric Analysis," 2004 Meeting Papers 201, Society for Economic Dynamics.
    11. Alastair McFarlane, 2001. "Rent stabilization and the long-run supply of housing," Urban/Regional, EconWPA 0109001, EconWPA.
    12. Andreas Lehnert, 2004. "Housing, consumption, and credit constraints," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-63, Board of Governors of the Federal Reserve System (U.S.).
    13. Stephen Malpezzi & Larry Ozanne & Thomas G. Thibodeau, 1987. "Microeconomic Estimates of Housing Depreciation," Land Economics, University of Wisconsin Press, vol. 63(4), pages 372-385.
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