An Equilibrium Analysis of the Rise in House Prices and Mortgage Debt
AbstractThis paper examines the contributions of population aging, mortgage innovation and historically low interest rates to the sharp rise in U.S. house prices and mortgage debt between 1994 and 2005. I construct an overlapping generations general equilibrium housing model and find that these three factors together account for over half of the increase in house prices and most of the increase in mortgage debt during this period. Population aging contributes to rising house prices and mortgage debt, but it accounts for only a small portion of their observed changes. Meanwhile, mortgage innovation significantly increases the mortgage borrowing of various age cohorts, but it has a trivial effect on house prices because interest rates rise due to higher demand for mortgage loans. This increases households’ savings in financial assets and leaves their housing assets nearly unchanged. The observed run-up in house prices can, however, be justified in an open-economy setting where interest rates fall due to a global saving glut. Declining interest rates force households at prime saving ages to reallocate their wealth from financial assets to housing assets, which dramatically drives up house prices.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 13-9.
Length: 40 pages
Date of creation: 2013
Date of revision:
Contact details of provider:
Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/
Asset Pricing; Credit and credit aggregates; Economic models;
Find related papers by JEL classification:
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-05-05 (All new papers)
- NEP-BAN-2013-05-05 (Banking)
- NEP-DGE-2013-05-05 (Dynamic General Equilibrium)
- NEP-MAC-2013-05-05 (Macroeconomics)
- NEP-URE-2013-05-05 (Urban & Real Estate Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hansen, G.D., 1991.
"The Cyclical and Secular Behavior of the Labor Input : Comparing Efficiency Units and Hours Worked,"
36, California Los Angeles - Applied Econometrics.
- Hansen, G D, 1993. "The Cyclical and Secular Behaviour of the Labour Input: Comparing Efficiency Units and Hours Worked," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(1), pages 71-80, Jan.-Marc.
- Antonia Diaz & Maria J. Luengo-Prado, 2006.
"On The User Cost And Homeownership,"
Economics Working Papers
we065421, Universidad Carlos III, Departamento de Economía.
- Joseph Gruber & Robert Martin, 2003. "Precautionary savings and the wealth distribution with illiquid durables," International Finance Discussion Papers 773, Board of Governors of the Federal Reserve System (U.S.).
- Reinhart, Carmen & Ogaki, Masao, 1995.
"Measuring intertemporal substitution: The role of durable goods,"
13690, University Library of Munich, Germany.
- Masao Ogaki & Carmen M. Reinhart, 1998. "Measuring Intertemporal Substitution: The Role of Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 1078-1098, October.
- Ogaki, M & Reinhart, C-M, 1995. "Measuring Intertemporal Substitution : The Role of Durable Goods," RCER Working Papers 404, University of Rochester - Center for Economic Research (RCER).
- James M. Poterba, 2001. "Demographic Structure And Asset Returns," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 565-584, November.
- Storesletten, Kjetil, 1998.
"Sustaining Fiscal Policy Through Immigration,"
664, Stockholm University, Institute for International Economic Studies.
- Gouveia, Miguel & Strauss, Robert P., 1994. "Effective Federal Individual Tax Functions: An Exploratory Empirical Analysis," National Tax Journal, National Tax Association, vol. 47(2), pages 317-39, June Cita.
- Kamila Sommer & Paul Sullivan & Randal Verbrugge, 2010. "Run-up in the House Price-Rent Ratio: How Much Can Be Explained by Fundamentals?," Working Papers 441, U.S. Bureau of Labor Statistics.
- Matthew Chambers & Carlos Garriga & Don Schlagenhauf, 2009.
"The loan structure and housing tenure decisions in an equilibrium model of mortgage choice,"
2008-024, Federal Reserve Bank of St. Louis.
- Matt Chambers & Carlos Garriga & Don Schlagenhauf, 2009. "The Loan Structure and Housing Tenure Decisions in an Equilibrium Model of Mortgage Choice," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 444-468, July.
- Erosa, Andres & Koreshkova, Tatyana, 2007. "Progressive taxation in a dynastic model of human capital," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 667-685, April.
- Makoto Nakajima, 2010. "Optimal capital income taxation with housing," Working Papers 10-11, Federal Reserve Bank of Philadelphia.
- Waldron, Matt & Zampolli, Fabrizio, 2010. "Household debt, house prices and consumption in the United Kingdom: a quantitative theoretical analysis," Bank of England working papers 379, Bank of England.
- Martin Gervais, 1998.
"Housing Taxation and Capital Accumulation,"
UWO Department of Economics Working Papers
9807, University of Western Ontario, Department of Economics.
- Matthew Chambers & Carlos Garriga, 2005.
"Accounting for Changes in the Homeownership Rate,"
Computing in Economics and Finance 2005
304, Society for Computational Economics.
- Matthew Chambers & Carlos Garriga & Don E. Schlagenhauf, 2009. "Accounting For Changes In The Homeownership Rate," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(3), pages 677-726, 08.
- Yoshiro Miwa & Matthew Chambers & Carlos Garriga & Don E. Schlagenhauf, 2004. "Accounting for Changes in the Homeownership Rate," CIRJE F-Series CIRJE-F-312, CIRJE, Faculty of Economics, University of Tokyo.
- Matthew Chambers & Carlos Garriga & Don E. Schlagenhauf, 2007. "Accounting for changes in the homeownership rate," Working Paper 2007-21, Federal Reserve Bank of Atlanta.
- Matthew Chambers & Carlos Garriga & Don Schlagenhauf, 2007. "Accounting for changes in the homeownership rate," Working Papers 2007-034, Federal Reserve Bank of St. Louis.
- Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2000.
"Consumption and Risk Sharing Over the Life Cycle,"
NBER Working Papers
7995, National Bureau of Economic Research, Inc.
- Storesletten, Kjetil & Telmer, Chris & Yaron, Amir, 2002. "Consumption and Risk Sharing Over the Life Cycle," Seminar Papers 702, Stockholm University, Institute for International Economic Studies.
- Kjetil Storesletten & Chris Telmer & Amir Yaron, 1997. "Consumption and risk sharing over the life cycle," GSIA Working Papers 228, Carnegie Mellon University, Tepper School of Business.
- Libertad Gonzalez & Francesc Ortega, 2009.
"Immigration and Housing Booms: Evidence from Spain,"
CReAM Discussion Paper Series
0919, Centre for Research and Analysis of Migration (CReAM), Department of Economics, University College London.
- Libertad Gonzalez & Francesc Ortega, 2013. "Immigration And Housing Booms: Evidence From Spain," Journal of Regional Science, Wiley Blackwell, vol. 53(1), pages 37-59, 02.
- Libertad González Luna & Francesc Ortega, 2009. "Immigration and housing booms: Evidence from Spain," Economics Working Papers 1167, Department of Economics and Business, Universitat Pompeu Fabra.
- Gonzalez, Libertad & Ortega, Francesc, 2009. "Immigration and Housing Booms: Evidence from Spain," IZA Discussion Papers 4333, Institute for the Study of Labor (IZA).
- James M. Poterba, 2004.
"The impact of population aging on financial markets,"
Proceedings - Economic Policy Symposium - Jackson Hole,
Federal Reserve Bank of Kansas City, issue Aug, pages 163-216.
- James Poterba, 2004. "The Impact of Population Aging on Financial Markets," NBER Working Papers 10851, National Bureau of Economic Research, Inc.
- Chambers, Matthew & Garriga, Carlos & Schlagenhauf, Don E., 2009. "Housing policy and the progressivity of income taxation," Journal of Monetary Economics, Elsevier, vol. 56(8), pages 1116-1134, November.
- Satyajit Chatterjee & Burcu Eyigungor, 2009. "Foreclosures and house price dynamics: a quantitative analysis of the mortgage crisis and the foreclosure prevention policy," Working Papers 09-22, Federal Reserve Bank of Philadelphia.
- Fang Yang, 2009.
"Consumption over the Life Cycle: How Different is Housing?,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 423-443, July.
- Fang Yang, 2008. "Code and data files for "Consumption over the Life Cycle: How Different is Housing?"," Computer Codes 06-210, Review of Economic Dynamics.
- Robin Brooks, 2002. "Asset-Market Effects of the Baby Boom and Social-Security Reform," American Economic Review, American Economic Association, vol. 92(2), pages 402-406, May.
- Jesus Fernandez-Villaverde & Dirk Krueger, 2002.
"Consumption over the Life Cycle: Facts from Consumer Expenditure Survey Data,"
NBER Working Papers
9382, National Bureau of Economic Research, Inc.
- Jesus Fernández-Villaverde & Dirk Krueger, 2007. "Consumption over the Life Cycle: Facts from Consumer Expenditure Survey Data," The Review of Economics and Statistics, MIT Press, vol. 89(3), pages 552-565, August.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.