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Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints

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  • Ortalo-Magné, François
  • Rady, Sven

Abstract

This Paper presents a dynamic theory of housing market fluctuations. It develops a life-cycle model where households are heterogeneous with respect to income and preferences, and mortgage lending is restricted by a down-payment requirement. The market interaction of young credit-constrained households with older or richer unconstrained households generates the following results. (1) Current income of young credit-constrained households affects housing prices independently of aggregate income. (2) Housing prices and the number of housing transactions are positively correlated. (3) Housing prices over-react to income shocks. (4) A relaxation of the down-payment constraint triggers a boom-bust cycle. These results are consistent with patterns observed in the US and the UK.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3015.

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Date of creation: Oct 2001
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Handle: RePEc:cpr:ceprdp:3015

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Keywords: credit constraints; financial liberalization; housing prices and transactions; income shocks; overlapping generations;

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