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Housing Market Dynamics

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Author Info
Rady, Sven
Ortalo-Magné, François

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Abstract

This paper presents a dynamic theory of housing market fluctuations. It develops a life-cycle model where households are heterogeneous with respect to income and preferences, and mortgage lending is restricted by a down-payment requirement. The market interaction of young credit-constrained households with older or richer unconstrained households generates the following results. (1) Current income of young credit-constrained households affects housing prices independently of aggregate income. (2) Housing prices and the number of housing transactions are positively correlated. (3) Housing prices over-react to income shocks. (4) A relaxation of the down-payment constraint triggers a boom-bust cycle. These results are consistent with patterns observed in the US and the UK.

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Publisher Info
Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 20.

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Date of creation: Apr 2001
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Handle: RePEc:lmu:muenec:20

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Related research
Keywords: Housing Demand ; Income Fluctuations ; Overlapping Generations ; Collateral Constraint;

Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
R21 - Urban, Rural, and Regional Economics - - Household Analysis - - - Housing Demand

Cited by:
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  1. Yoshida, Jiro, 2007. "Technology Shocks and Asset Price Dynamics: The Role of Housing in General Equilibrium," MPRA Paper 6271, University Library of Munich, Germany, revised 05 Mar 2008. [Downloadable!]
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This page was last updated on 2009-11-26.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.