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Housing Bubbles

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  • Arce, Oscar
  • López-Salido, J David

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 fund-draining 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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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6932.

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Date of creation: Aug 2008
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Handle: RePEc:cpr:ceprdp:6932

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

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References

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  1. Boyan Jovanovic, 2008. "Bubbles in Prices of Exhaustible Resources," 2008 Meeting Papers 26, Society for Economic Dynamics.
  2. 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.
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  17. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  18. 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.
  19. Woodford, Michael, 1986. "Stationary sunspot equilibria in a finance constrained economy," Journal of Economic Theory, 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
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. 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).
  2. 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.
  3. Arce, Óscar & Manuel Campa, José & Gavilán, Ángel, 2013. "Macroeconomic adjustment under loose financing conditions in the construction sector," European Economic Review, Elsevier, vol. 59(C), pages 19-34.
  4. Luisa Lambertini & Caterina Mendicino & Maria Teresa Punzi, 2010. "Expectations-driven cycles in the housing market," Banco de Espa�a Working Papers 1021, Banco de Espa�a.
  5. Yu Zhu & Randall Wright & Chao He, 2012. "Housing and Liquidity," 2012 Meeting Papers 94, Society for Economic Dynamics.
  6. Jan K. Brueckner & Paul S. Calem & Leonard I. Nakamura, 2011. "Subprime mortgages and the housing bubble," Working Papers 11-12, Federal Reserve Bank of Philadelphia.
  7. 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.

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