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Housing Market Fluctuations in a Life-Cycle Economy with Credit Constraints

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Sven Rady

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Abstract

This paper presents a first step towards a new theory of housing market fluctuations. We develop a life-cycle model where agents face credit constraints and their housing consumption is restricted to a discrete set of possibilities. The market interaction of young credit constrained agents climbing the property ladder with old agents trading down, generates co-movements of aggregate house prices, volume of transactions and income, consistent with the patterns observed in the U.S and the UK Under plausible assumptions the model reproduces the slight lead of transaction volume over the other two series as documented in the data. Our theory asserts that the fluctuations in housing prices depend crucially on fluctuation in the current income of young household the first-time buyers). Thus, it sheds light on why housing prices are more volatile than GDP, and why they exhibit some degree of predictability in a market where households optimise over the timing of their transaction.

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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp296.

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Date of creation: Jun 1998
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Handle: RePEc:fmg:fmgdps:dp296

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  1. John Abowd & Charles Mulvey, 1979. "Estimating the Union-Non-union Wage Differential: A Statistical Issue," Working Papers 488, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
  2. Scott, A. & Uhlig, H., 1998. "Fickle investors : an impediment to growth?," Discussion Paper 134, Tilburg University, Center for Economic Research. [Downloadable!]
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  3. Charles Ka Yui Leung & Nan-Kuang Chen, 2006. "Intrinsic Cycles of Land Price: A Simple Model," Journal of Real Estate Research, American Real Estate Society, vol. 28(3), pages 293-320. [Downloadable!]
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  4. Andrew Coleman, 2007. "Credit constraints and housing markets in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2007/11, Reserve Bank of New Zealand. [Downloadable!]
  5. Grace Wong, 2004. "Has SARS Infected the Property Market? Evidence from Hong Kong," Working Papers 11, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
  6. Francois Ortalo-Magne & Sven Rady, 2001. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  7. Sang-Wook Stanley Cho, 2007. "Household Wealth Accumulation and Portfolio Choices in Korea," Discussion Papers 2007-26, School of Economics, The University of New South Wales. [Downloadable!]
  8. Joseph Nichols, 2004. "A Life-cycle Model with Housing, Portfolio Allocation, and Mortgage Financing," Econometric Society 2004 North American Winter Meetings 205, Econometric Society. [Downloadable!]
  9. Grace Wong, 2004. "Has SARS Infected the Property Market? Evidence from Hong Kong," Working Papers 867, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
  10. Joseph B. Nichols, 2007. "Nominal mortgage contracts and the effects of inflation on portfolio allocation," Finance and Economics Discussion Series 2007-67, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  11. Gary Engelhardt, 2001. "Nominal Loss Aversion, Housing Equity Constraints, and Household Mobility: Evidence from the United States," Center for Policy Research Working Papers 42, Center for Policy Research, Maxwell School, Syracuse University. [Downloadable!]
  12. Charles Leung & Dandan Feng, 2005. "What Drives the Property Price-Trading Volume Correlation? Evidence from a Commercial Real Estate Market," The Journal of Real Estate Finance and Economics, Springer, vol. 31(2), pages 241-255, September. [Downloadable!] (restricted)
  13. Basant Kapur, 2006. "Financial liberalization and short-run housing price dynamics," Economic Theory, Springer, vol. 29(3), pages 649-675, November. [Downloadable!] (restricted)
  14. Sang-Wook Stanley Cho, 2007. "Accounting for Lifecycle Wealth Accumulation: The Role of Housing Institution," Discussion Papers 2007-27, School of Economics, The University of New South Wales. [Downloadable!]
  15. Charles Ka Yui Leung & Dandan Feng, 2004. "Testing Alternative Theories of Property Price-Trading Volume with Commercial Real Estate Market Data," Discussion Papers 00003, Chinese University of Hong Kong, Department of Economics. [Downloadable!]
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  16. Michael Fratantoni & Scott Schuh, 2000. "Monetary policy, housing investment, and heterogeneous regional markets," Working Papers 00-1, Federal Reserve Bank of Boston. [Downloadable!]
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