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Housing bubbles

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Author Info

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

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References

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  1. 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.
  2. Jaume Ventura, 2002. "Bubbles and Capital Flows," NBER Working Papers 9304, National Bureau of Economic Research, Inc.
  3. Obstfeld, Maurice & Rogoff, Kenneth, 1983. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(4), pages 675-87, August.
  4. Ortalo-Magné, François & Rady, Sven, 2001. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3015, C.E.P.R. Discussion Papers.
  5. Poterba, James M, 1984. "Tax Subsidies to Owner-occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 99(4), pages 729-52, November.
  6. Alberto Martin, 2010. "Economic Growth with Bubbles," 2010 Meeting Papers, Society for Economic Dynamics 788, Society for Economic Dynamics.
  7. Boyan Jovanovic, 2008. "Bubbles in Prices of Exhaustible Resources," 2008 Meeting Papers 26, Society for Economic Dynamics.
  8. 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.
  9. Ricardo J. Caballero, 2006. "On the Macroeconomics of Asset Shortages," NBER Working Papers 12753, National Bureau of Economic Research, Inc.
  10. 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.
  11. S. Rao Aiyagari, 1987. "Equilibrium existence in an overlapping generations model with altruistic preferences," Working Papers, Federal Reserve Bank of Minneapolis 356, Federal Reserve Bank of Minneapolis.
  12. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2011. "Winners and Losers in Housing Markets," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 43, pages 255-296, 03.
  13. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 66, pages 467.
  14. Ricardo J. Caballero & Arvind Krishnamurthy, 2005. "Bubbles and Capital Flow Volatility: Causes and Risk Management," NBER Working Papers 11618, National Bureau of Economic Research, Inc.
  15. Ricardo J. Caballero & Emmanuel Farhi & Mohamad L. Hammour, 2006. "Speculative Growth: Hints from the U.S. Economy," American Economic Review, American Economic Association, American Economic Association, vol. 96(4), pages 1159-1192, September.
  16. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2010. "Winners and Losers in House Markets," Working Papers, Central Bank of Cyprus 2010-5, Central Bank of Cyprus.
  17. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2007. " Winners and Losers in Housing Markets," CDMA Conference Paper Series, Centre for Dynamic Macroeconomic Analysis 0705, Centre for Dynamic Macroeconomic Analysis.
  18. 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.
  19. Woodford, Michael, 1986. "Stationary sunspot equilibria in a finance constrained economy," Journal of Economic Theory, Elsevier, Elsevier, vol. 40(1), pages 128-137, October.
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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
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Cited by:
  1. Luisa Lambertini & Caterina Mendicino & Maria Teresa Punzi, 2010. "Expectations-driven cycles in the housing market," Banco de Espa�a Working Papers, Banco de Espa�a 1021, Banco de Espa�a.
  2. Yu Zhu & Randall Wright & Chao He, 2013. "Housing and Liquidity," 2013 Meeting Papers, Society for Economic Dynamics 168, Society for Economic Dynamics.
  3. Arce, Óscar & Manuel Campa, José & Gavilán, Ángel, 2013. "Macroeconomic adjustment under loose financing conditions in the construction sector," European Economic Review, Elsevier, Elsevier, vol. 59(C), pages 19-34.
  4. Basco, Sergi, 2014. "Globalization and financial development: A model of the Dot-Com and the Housing Bubbles," Journal of International Economics, Elsevier, Elsevier, vol. 92(1), pages 78-94.
  5. 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.
  6. 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).
  7. 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.

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