Advanced Search
MyIDEAS: Login to save this paper or follow this series

House Prices, Rents, and Interest Rates under Collateral Constraints

Contents:

Author Info

  • Óscar J. Arce

    ()
    (Banco de España)

  • David López-Salido

    ()
    (Banco de España
    Centre for Economic Policy Research (CEPR))

Abstract

We develop an OLG model aimed at explaining the joint determination of housing prices, rents, and interest rates, in an environment featuring a positive home ownership bias and individual borrowing limits that generate a mismatch between desired and available funds to finance housing purchases. Individual heterogeneity on this mismatch gives rise to three different types of households: renters, landlords (i.e. buy-to-let investors, who provide the stock of houses for rent) and home buyers who do not participate in the rental market. We investigate the conditions under which two alternative stationary equilibria may coexist: (i) a low valuation equilibrium (LVE) in which landlords do not exhaust their borrowing limits; and (ii) a high valuation one (HVE) where every household is financially constrained at the time of purchasing its housing stock. In a HVE (relative to the LVE) the volume of buy-to-let investment, the price-to-rent ratio and the housing price are higher while the interest rate is lower. Due to binding borrowing constraints, in a HVE further reductions in the interest rate only bear a positive networth effect through a reduction of the cost of repaying outstanding mortgaged debt, which fuels future availability of funds, thus sustaining the higher demand for credit. More generally, coexistence of both types of equilibria provides a rationale for the existence of speculative paths from a LVE to a HVE.

Download Info

If 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.
File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/06/Fic/dt0610e.pdf
File Function: First version, April 2006
Download Restriction: no

Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0610.

as in new window
Length: 45 pages
Date of creation: Apr 2006
Date of revision:
Handle: RePEc:bde:wpaper:0610

Contact details of provider:
Email:
Web page: http://www.bde.es/
More information through EDIRC

Related research

Keywords: price-to-rent ratio; collateral constraints; buy-to-let investment; multiple equilibria;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Luis J. Álvarez & Ignacio Hernando, 2005. "The price setting behaviour of Spanish firms: evidence from survey data," Banco de Espa�a Working Papers, Banco de Espa�a 0537, Banco de Espa�a.
  2. Matthew Chambers & Carlos Garriga & Don Schlagenhauf, 2007. "Accounting for changes in the homeownership rate," Working Papers, Federal Reserve Bank of St. Louis 2007-034, Federal Reserve Bank of St. Louis.
  3. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing high house prices: bubbles, fundamentals, and misperceptions," Staff Reports, Federal Reserve Bank of New York 218, Federal Reserve Bank of New York.
  4. Morris Davis & Jonathan Heathcote, 2004. "Housing and the business cycle," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-11, Board of Governors of the Federal Reserve System (U.S.).
  5. Berben, Robert-Paul & Locarno, Alberto & Morgan, Julian & Vallés, Javier, 2004. "Cross-country differences in monetary policy transmission," Working Paper Series, European Central Bank 0400, European Central Bank.
  6. Luis J. �lvarez & Pablo Burriel & Ignacio Hernando, 2010. "Price-setting behaviour in Spain: evidence from micro PPI data," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(2-3), pages 105-121.
  7. Javier Andres & J. David López-Salido & Edward Nelson, 2005. "Sticky-price models and the natural rate hypothesis," Working Papers, Federal Reserve Bank of St. Louis 2005-018, Federal Reserve Bank of St. Louis.
  8. Kiminori Matsuyama, 1990. "Increasing Returns, Industrialization and Indeterminacy of Equilibrium," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 878, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. John V. Duca, 2005. "Making sense of elevated housing prices," Southwest Economy, Federal Reserve Bank of Dallas, Federal Reserve Bank of Dallas, issue Sep, pages 1, 7-13.
  10. John Y. Campbell & Robert J. Shiller, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," NBER Working Papers 2100, National Bureau of Economic Research, Inc.
  11. Campbell, John & Cocco, Joao, 2007. "How Do House Prices Affect Consumption? Evidence from Micro Data," Scholarly Articles 3122600, Harvard University Department of Economics.
  12. Ricardo Caballero & Emmanuel Farhi & Mohamad L. Hammour, 2004. "Speculative Growth: Hints from the US Economy," NBER Working Papers 10518, National Bureau of Economic Research, Inc.
  13. Dirk Krueger & Karsten Jeske, 2005. "Housing and the Macroeconomy: The Role of Implicit Guarantees for Government Sponsored Enterprises," 2005 Meeting Papers, Society for Economic Dynamics 242, Society for Economic Dynamics.
  14. Brian Peterson, 2003. "Aggregate Uncertainty, Individual Uncertainty and the Housing Market," Computing in Economics and Finance 2003, Society for Computational Economics 178, Society for Computational Economics.
  15. Luis J. Álvarez & Emmanuel Dhyne & Marco Hoeberichts & C. Kwapil & Hervé Le Bihan & Patrick Lünnemann & Fernando Martins & R. Sabbatini & H. Stahl & Philip Vermeulen & Jouko Vilmunen, 2006. "Sticky Prices in The Euro Area: a Summary of New Micro Evidence," Working Papers, Banco de Portugal, Economics and Research Department w200605, Banco de Portugal, Economics and Research Department.
  16. Juan J. Dolado & Marcel Jansen & Juan F. Jimeno, 2005. "Dual employment protection legislation: a framework for analysis," Banco de Espa�a Working Papers, Banco de Espa�a 0510, Banco de Espa�a.
  17. Enrique Alberola & Luis Molina & Daniel Navia, 2005. "Say You Fix, Enjoy And Relax The Deleterious Effect Of Peg Announcements On Fiscal Discipline," International Finance, EconWPA 0509001, EconWPA.
  18. Máximo Camacho & Gabriel Pérez-Quirós, 2005. "Jump-and-rest effect of U.S. business cycles," Banco de Espa�a Working Papers, Banco de Espa�a 0507, Banco de Espa�a.
  19. Donald R. Haurin & Patric H. Hendershott & Susan M. Wachter, 1996. "Borrowing Constraints and the Tenure Choice of Young Households," NBER Working Papers 5630, National Bureau of Economic Research, Inc.
  20. S. Fabiani & M. Druant & I. Hernando & C. Kwapil & B. Landau & C. Loupias & F. Martins & T. Mathä & R. Sabbatini & H. Stahl & A. Stokman, 2005. "The pricing behaviour of firms in the euro area : new survey evidence," Working Paper Research, National Bank of Belgium 76, National Bank of Belgium.
  21. Arturo Galindo & Alejandro Izquierdo & José Manuel Montero, 2006. "Real Exchange Rates, Dollarization and Industrial Employment in Latin America," Research Department Publications, Inter-American Development Bank, Research Department 4478, Inter-American Development Bank, Research Department.
  22. Sven Rady & François Ortalo-Magné, 2001. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints," CESifo Working Paper Series 470, CESifo Group Munich.
  23. Martin Gervais, 1998. "Housing Taxation and Capital Accumulation," UWO Department of Economics Working Papers, University of Western Ontario, Department of Economics 9807, University of Western Ontario, Department of Economics.
  24. José Manuel Campa & Linda S. Goldberg & José M. González-Mínguez, 2005. "Exchange-Rate Pass-Through to Import Prices in the Euro Area," NBER Working Papers 11632, National Bureau of Economic Research, Inc.
  25. Dean Baker, 2005. "The Housing Bubble Fact Sheet," CEPR Reports and Issue Briefs, Center for Economic and Policy Research (CEPR) 2005-22, Center for Economic and Policy Research (CEPR).
  26. Ayuso, Juan & Restoy, Fernando, 2006. "House prices and rents: An equilibrium asset pricing approach," Journal of Empirical Finance, Elsevier, Elsevier, vol. 13(3), pages 371-388, June.
  27. Rui Yao, 2005. "Optimal Consumption and Portfolio Choices with Risky Housing and Borrowing Constraints," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 18(1), pages 197-239.
  28. Ignacio García-Pérez & Juan F. Jimeno, 2005. "Public sector wage gaps in Spanish regions," Banco de Espa�a Working Papers, Banco de Espa�a 0526, Banco de Espa�a.
  29. Jeremy C. Stein, 1993. "Prices and Trading Volume in the Housing Market: A Model with Downpayment Effects," NBER Working Papers 4373, National Bureau of Economic Research, Inc.
  30. Fang Yang, 2005. "Consumption Along the Life Cycle: How Different is Housing?," 2005 Meeting Papers, Society for Economic Dynamics 718, Society for Economic Dynamics.
  31. James Berkovec & Don Fullerton, 1993. "A General Equilibrium Model of Housing, Taxes, and Portfolio Choice," NBER Working Papers 3505, National Bureau of Economic Research, Inc.
  32. Ricardo J. Caballero & Mohamad L. Hammour, 2002. "Speculative Growth," NBER Working Papers 9381, National Bureau of Economic Research, Inc.
  33. Henderson, J Vernon & Ioannides, Yannis M, 1983. "A Model of Housing Tenure Choice," American Economic Review, American Economic Association, American Economic Association, vol. 73(1), pages 98-113, March.
  34. Jonathan McCarthy & Richard W. Peach, 2004. "Are home prices the next "bubble"?," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Dec, pages 1-17.
  35. Silvia Fabiani & Martine Druant & Ignacio Hernando & Claudia Kwapil & Bettina Landau & Claire Loupias & Fernando Martins & Thomas Mathä & Roberto Sabbatini & Harald Stahl & Ad Stokman, 2006. "What Firms' Surveys Tell Us about Price-Setting Behavior in the Euro Area," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
  36. Peter Linneman & Susan Wachter, 1989. "The Impacts of Borrowing Constraints on Homeownership," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 17(4), pages 389-402.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bde:wpaper:0610. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mar�a Beiro. Electronic Dissemination of Information Unit. Research Department. Banco de Espa�a).

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.