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Modelling Household's Savings and Dwellings Investment - a Portfolio Choice Approach

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  • Gábor Vadas

    ()
    (Magyar Nemzeti Bank)

Abstract

One important characteristic of dwellings is that housing can be regarded as an investment or asset. Our paper focuses on this function of dwellings and develops a stochastic portfolio choice model for the housing market, which is easy to incorporate into medium and large-scale macro models. Theoretical results suggest that house prices move in line with households’ income, although house prices have a higher variance than income does. Another important implication of the model is that the portfolio share of housing investment depends on the excess return, defined as the difference between return on housing and financial investment and the variance of excess return describing the riskiness of an asset. Our intention is to test these theoretical implications of the model on several countries, however we only test on UK data, due to the data availability. In this case, empirical results strengthen the model framework.

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Bibliographic Info

Paper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Working Papers with number 2003/6.

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Length: 36 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:mnb:wpaper:2003/6

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Keywords: households' behaviour; housing investment; saving; portfolio decision; house price.;

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  1. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
  2. Malpezzi, Stephen, 1999. "A Simple Error Correction Model of House Prices," Journal of Housing Economics, Elsevier, vol. 8(1), pages 27-62, March.
  3. Muellbauer, John & Murphy, Anthony, 1997. "Booms and Busts in the UK Housing Market," Economic Journal, Royal Economic Society, vol. 107(445), pages 1701-27, November.
  4. Nathalie Girouard & Sveinbjörn Blöndal, 2001. "House Prices and Economic Activity," OECD Economics Department Working Papers 279, OECD Publishing.
  5. Christopher J. Mayer & C. Tsuriel Somerville, 1996. "Unifying empirical and theoretical models of housing supply," Working Papers 96-12, Federal Reserve Bank of Boston.
  6. James M. Poterba, 1983. "Tax Subsidies to Owner-occupied Housing: An Asset Market Approach," Working papers 339, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Case, Karl E. & Quigley, John M. & Shiller, Robert J., 2001. "Comparing Wealth Effects: The Stock Market versus The Housing Market," Department of Economics, Working Paper Series qt44k6g6vx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  8. Zoltán M. Jakab & András Mihály Kovács, 2002. "Hungary in the NIGEM model," MNB Working Papers 2002/3, Magyar Nemzeti Bank (the central bank of Hungary).
  9. Johansen, S., 1991. "Determination of Cointegration Rank in the Presence of a Linear Trend," Papers 76a, Helsinki - Department of Economics.
  10. Pain, Nigel & Westaway, Peter, 1997. "Modelling structural change in the UK housing market: A comparison of alternative house price models," Economic Modelling, Elsevier, vol. 14(4), pages 587-610, October.
  11. Ming-Chi Chen & Kanak Patel, 1998. "House Price Dynamics and Granger Causality: An Analysis of Taipei New Dwelling Market," International Real Estate Review, Asian Real Estate Society, vol. 1(1), pages 101-126.
  12. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  13. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
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Cited by:
  1. Gergely Kiss & Gábor Vadas, 2005. "The Role of the Housing Market in Monetary Transmission," MNB Background Studies (discontinued) 2005/3, Magyar Nemzeti Bank (the central bank of Hungary).
  2. Vadas, Gábor & Kiss, Gergely, 2006. "A lakáspiac szerepe a monetáris transzmisszióban
    [The role of the housing market in monetary transmission]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(5), pages 408-427.

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