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Owner-occupied housing as an investment, regional house price cycles and residential sorting

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Author Info

  • Haavio, Markus

    ()
    (Bank of Finland Research)

  • Kauppi , Heikki

    ()
    (Turku School of Economics)

Abstract

We develop a dynamic multi-region model, with fluctuating regional house prices, where an owner-occupied household’s location choice depends on its current wealth and its current type and involves both consumption and investment considerations. The relative strength of the consumption motive and the investment motive in the location choice determines the equilibrium pattern of residential sorting, with a strong investment (consumption) motive implying sorting according to the type (wealth). The model predicts a negative relation between the size of house price fluctuations and the degree of residential sorting in the type dimension. Also, movers should be more sorted than stayers in the type dimension. These predictions are consistent with evidence from US metropolitan areas when income, education and age are used as proxies for household type.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1124.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 24/2011.

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Length: 88 pages
Date of creation: 20 Dec 2011
Date of revision:
Handle: RePEc:hhs:bofrdp:2011_024

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Keywords: residential sorting; house prices; consumption motive; investment motive; incomplete markets; household mobility;

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  1. Ferreira, Fernando & Gyourko, Joseph & Tracy, Joseph, 2010. "Housing busts and household mobility," Journal of Urban Economics, Elsevier, vol. 68(1), pages 34-45, July.
  2. Edward L. Glaeser & Joseph Gyourko, 2005. "Urban Decline and Durable Housing," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 345-375, April.
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  8. Patrick Bayer & Bryan Ellickson & Paul B. Ellickson, 2010. "Dynamic Asset Pricing in a System of Local Housing Markets," American Economic Review, American Economic Association, vol. 100(2), pages 368-72, May.
  9. Karl E. Case & Christopher J. Mayer, 1995. "Housing Price Dynamics Within a Metropolitan Area," NBER Working Papers 5182, National Bureau of Economic Research, Inc.
  10. Eberts, Randall W. & Gronberg, Timothy J., 1981. "Jurisdictional homogeneity and the Tiebout hypothesis," Journal of Urban Economics, Elsevier, vol. 10(2), pages 227-239, September.
  11. Benabou, Roland, 1996. "Equity and Efficiency in Human Capital Investment: The Local Connection," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 237-64, April.
  12. Epple, Dennis & Filimon, Radu & Romer, Thomas, 1984. "Equilibrium among local jurisdictions: toward an integrated treatment of voting and residential choice," Journal of Public Economics, Elsevier, vol. 24(3), pages 281-308, August.
  13. Brueckner, Jan K, 1997. "Consumption and Investment Motives and the Portfolio Choices of Homeowners," The Journal of Real Estate Finance and Economics, Springer, vol. 15(2), pages 159-80, October.
  14. Joao F. Cocco, 2005. "Portfolio Choice in the Presence of Housing," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 535-567.
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