On the importance of borrowing constraints for house price dynamics

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On the importance of borrowing constraints for house price dynamics

Author Info

Eerola, Essi () (University of Helsinki and HECER)
Määttänen, Niku () (The Research Institute of the Finnish Economy)

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Essi Eerola

Abstract

We study how a household borrowing constraint the the form of a down payment requirement affects house price dynamics in an OLG model with standard preferences. We find that in certain situations the borrowing constraint shapes house price dynamics substantially. The importance of the constraint depends very much on whether house price changes are driven by interest rate or aggregate income shocks. Moreover, because of the borrowing constraint, house price dynamics display substantial asymmetries between large positive and large negative income shocks. These results are related to the fact that the share of borrowing-constrained households is different following different shocks.

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Paper provided by Bank of Finland in its series Research Discussion Papers with number 8/2008.

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Length: 40 pages
Date of creation: 17 Mar 2008
Date of revision:
Handle: RePEc:hhs:bofrdp:2008_008

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Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
R21 - Urban, Rural, and Regional Economics - - Household Analysis - - - Housing Demand

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-03-25 (All new papers)
NEP-BEC-2008-03-25 (Business Economics)
NEP-DGE-2008-03-25 (Dynamic General Equilibrium)
NEP-GEO-2008-03-25 (Economic Geography)
NEP-MAC-2008-03-25 (Macroeconomics)
NEP-URE-2008-03-25 (Urban & Real Estate Economics)

References listed on IDEAS
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Full references

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.)

Jokivuolle, Esa & Virolainen, Kimmo & Vähämaa, Oskari, 2008. "Macro-model-based stress testing of Basel II capital requirements," Research Discussion Papers 17/2008, Bank of Finland. [Downloadable!]
Kilponen , Juha & Viren, Matti, 2008. "Why do growth rates differ? Evidence from cross-country data on private sector production," Research Discussion Papers 13/2008, Bank of Finland. [Downloadable!]

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