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The long-run relationship between house prices and income: evidence from local housing markets

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Author Info
Joshua Gallin
Abstract

The proposition that "housing prices can't continue to outpace growth in household income" (Wall Street Journal; July 25, 2002) is the received wisdom among many housing-market observers. More formally, many in the housing literature argue that house prices and income are cointegrated. In this paper, I show that the data do not support this view. Standard tests using 27 years of national-level data do not find evidence of cointegration. However, it is known that tests for cointegration have low power, especially in small samples. I use panel-data tests for cointegration that have been shown to be more powerful than their standard time-series counterparts to test for cointegration in a panel of 95 metro areas over 23 years. Using a bootstrap approach to allow for cross-correlations in city-level house-price shocks, I show that even these more powerful tests do not reject the hypothesis of no cointegration. Thus the error-correction specification for house prices and income commonly found in the literature may be inappropriate.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2003-17.

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Date of creation: 2003
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Handle: RePEc:fip:fedgfe:2003-17

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Keywords: Housing ; Housing - Prices;

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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.:
  1. Chihwa Kao & Suzanne McCoskey, 1997. "A Residual-Based Test Of The Null Of Cointegration In Panel Data," Econometrics 9711002, EconWPA. [Downloadable!]
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  2. Quah, D., 1993. "Exploiting Cross Section Variation for Unit Root Inference in Dynamic Data," Papers 549, Stockholm - International Economic Studies.
    Other versions:
  3. Banerjee, Anindya, 1999. " Panel Data Unit Roots and Cointegration: An Overview," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 607-29, Special I. [Downloadable!] (restricted)
  4. Pierre Perron & Robert J. Shiller, 1984. "Testing the Random Walk Hypothesis: Power Versus Frequency of Observation," Cowles Foundation Discussion Papers 732, Cowles Foundation, Yale University. [Downloadable!]
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  5. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  6. Meen, Geoffrey, 2002. "The Time-Series Behavior of House Prices: A Transatlantic Divide?," Journal of Housing Economics, Elsevier, vol. 11(1), pages 1-23, March. [Downloadable!] (restricted)
  7. David Reifschneider & Robert Tetlow & John Williams, 1999. "Aggregate disturbances, monetary policy, and the macroeconomy: the FRB/US perspective," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-19. [Downloadable!]
  8. Edward L. Glaeser & Joseph Gyourko, 2002. "The Impact of Zoning on Housing Affordability," Harvard Institute of Economic Research Working Papers 1948, Harvard - Institute of Economic Research. [Downloadable!]
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  9. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May. [Downloadable!] (restricted)
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  10. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I. [Downloadable!] (restricted)
  11. Dennis R. Capozza & Patric H. Hendershott & Charlotte Mack & Christopher J. Mayer, 2002. "Determinants of Real House Price Dynamics," NBER Working Papers 9262, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Malpezzi, Stephen, 1999. "A Simple Error Correction Model of House Prices," Journal of Housing Economics, Elsevier, vol. 8(1), pages 27-62, March. [Downloadable!] (restricted)
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  13. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
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Cited by:
(explanations, 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.)

  1. Balazs Egert, 2007. "Real Convergence, Price Level Convergence and Inflation Differentials in Europe," William Davidson Institute Working Papers Series wp895, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
    Other versions:
  2. Sean Holly & M. Hashem Pesaran & Takashi Yamagata, 2006. "A Spatio-Temporal Model of House Prices in the US," IZA Discussion Papers 2338, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  3. Calvin Schnure, 2005. "Boom-Bust Cycles in Housing: The Changing Role of Financial Structure," IMF Working Papers 05/200, International Monetary Fund. [Downloadable!]
  4. Sergio Clavijo & Michel Janna & Santiago Munoz, 2005. "The Housing Market in Colombia: Socioeconomic and Financial Determinants," RES Working Papers 4389, Inter-American Development Bank, Research Department. [Downloadable!]
  5. Cabray L. Haines & Richard J. Rosen, 2007. "Bubble, bubble, toil, and trouble," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 16-35. [Downloadable!]
  6. Sei-Wan Kim & Radha Bhattacharya, 2009. "Regional Housing Prices in the USA: An Empirical Investigation of Nonlinearity," The Journal of Real Estate Finance and Economics, Springer, vol. 38(4), pages 443-460, May. [Downloadable!] (restricted)
  7. Davis, Morris & Heathcote, Jonathan, 2005. "The Price and Quantity of Residential Land in the United States," CEPR Discussion Papers 5333, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  8. Sergio Clavijo & Michel Janna & Santiago Muñoz, 2004. "LA VIVIENDA EN COLOMBIA: Sus Determinantes Socio-Económicos y Financieros," BORRADORES DE ECONOMIA 003099, BANCO DE LA REPÚBLICA. [Downloadable!]
  9. Sergio Clavijo & Michel Janna & Santiago Munoz, 2005. "El mercado colombiano de la vivienda: factores socioeconómicos y financieros determinantes," RES Working Papers 4390, Inter-American Development Bank, Research Department. [Downloadable!]
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