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Housing bubbles

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  • Óscar J. Arce

    ()
    (Banco de España)

  • J. David López-Salido

    ()
    (Federal Reserve Board)

Abstract

In this paper we use the notion of a housing bubble as an equilibrium in which some investors hold houses only for resale purposes and not for the expectation of a dividend, either in the form of rents or utility. We provide a life-cycle model where households face collateral constraints that tie their credit capacity to the value of their houses and examine the conditions under which housing bubbles can emerge. In such equilibria, the total housing stock is held by owners that extract utility from their homes, landlords that obtain rents, and investors. We show that an economy with tighter collateral constraints is more prone to bubbles which, in turn, tend to have a larger size but are less fragile in face of funddraining shocks. Our environment also allows for pure bubbles on useless assets. We find that multiple equilibria in which the economy moves endogenously from a pure bubble to a housing bubble regime and vice versa are possible. This suggests that high asset price volatility may be a natural consequence of asset shortages (or excess funding) that depress interest rates sufficiently so as to sustain an initial bubble. We also examine some welfare implications of the two types of bubbles and discuss some mechanisms to rule out equilibria with housing bubbles.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/08/Fic/dt0815e.pdf
File Function: First version, August 2008
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0815.

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Length: 53 pages
Date of creation: Aug 2008
Date of revision:
Handle: RePEc:bde:wpaper:0815

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Related research

Keywords: collateral constraints; buy-to-let investment; housing bubbles; switching bubbles; welfare;

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References

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  1. S. Rao Aiyagari, 1987. "Equilibrium existence in an overlapping generations model with altruistic preferences," Working Papers 356, Federal Reserve Bank of Minneapolis.
  2. Jaume Ventura & Alberto Martin, 2010. "Economic Growth with Bubbles," Working Papers 445, Barcelona Graduate School of Economics.
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  4. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2007. " Winners and Losers in Housing Markets," CDMA Conference Paper Series 0705, Centre for Dynamic Macroeconomic Analysis.
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  11. Poterba, James M, 1984. "Tax Subsidies to Owner-occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 729-52, November.
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  14. 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.
  15. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2010. "Winners and Losers in House Markets," Working Papers 2010-5, Central Bank of Cyprus.
  16. Stein, Jeremy C, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 379-406, May.
  17. Woodford, Michael, 1986. "Stationary sunspot equilibria in a finance constrained economy," Journal of Economic Theory, Elsevier, vol. 40(1), pages 128-137, October.
  18. Henderson, J Vernon & Ioannides, Yannis M, 1983. "A Model of Housing Tenure Choice," American Economic Review, American Economic Association, vol. 73(1), pages 98-113, March.
  19. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2011. "Winners and Losers in Housing Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 255-296, 03.
  20. 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.
  21. Ricardo J. Caballero, 2006. "On the Macroeconomics of Asset Shortages," NBER Working Papers 12753, National Bureau of Economic Research, Inc.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. How can housing bubbles happen?
    by Economic Logician in Economic Logic on 2008-08-18 14:16:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Luisa Lambertini & Caterina Mendicino & Maria Teresa Punzi, . "Expectations-Driven Cycles in the Housing Market," Discussion Papers 12/08, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  2. Oscar Arce & Jose Manuel Campa & Angel Gavilan, 2012. "Macroeconomic Adjustment under Loose Financing Conditions in the Construction Sector," Working Papers 1226, BBVA Bank, Economic Research Department.
  3. Juan S Mora-Sanguinetti & Margarita Rubio, 2013. "Recent Reforms in Spanish Housing Markets: An Evaluation using a DSGE Model," Discussion Papers 2013/03, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  4. Yu Zhu & Randall Wright & Chao He, 2012. "Housing and Liquidity," 2012 Meeting Papers 94, Society for Economic Dynamics.
  5. Brueckner, Jan K. & Calem, Paul S. & Nakamura, Leonard I., 2012. "Subprime mortgages and the housing bubble," Journal of Urban Economics, Elsevier, vol. 71(2), pages 230-243.
  6. Basco, Sergi, 2014. "Globalization and financial development: A model of the Dot-Com and the Housing Bubbles," Journal of International Economics, Elsevier, vol. 92(1), pages 78-94.
  7. Fernando Ferreira & Joseph Gyourko, 2011. "Anatomy of the Beginning of the Housing Boom: U.S. Neighborhoods and Metropolitan Areas, 1993-2009," NBER Working Papers 17374, National Bureau of Economic Research, Inc.

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