Housing Boom and Bust Cycles

This paper describes a quantitative model developed to understand the key determinats of house prices boom-and-bust cycles. The key driving forces behind the boom are residential investment, immigration, current account deficits, relaxation of downpayment constraints, and the elimination of land regulation. Housing supply is comprised by the stock of housing and new construction. The baseline economy considers the housing boom in Spain because its peak surpased the magnitude in the United States by 15 percent. A calibrated version of the model for the Spanish economy replicates the pre-boom aggregates. The model predicts that a change in observed fundamentals can rationalize at least 84 percent of the recent boom in the value of housing capital. Without large current account deficits and demographic changes the size of the housing boom should have been much smaller. With respect to the housing bust, the model suggests that the combination of increasing mortgage rates, unemployment, and low productivity can have large effects in the value of housing capital. Some conservative predictions quantify adjustments that range between 24 and 29 percent. The paper explores the boom-bust cycles in other economies such as the United States and Japan.