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A New Perspective on the Relationship Between House Prices and Income

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Author Info
Quan Gan () (School of Economics, University of New South Wales)
Robert J. Hill () (School of Economics, University of New South Wales)

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Abstract

We show that a strong linear relationship exists between income and house price quantiles in Sydney (Australia), Houston, and the state of Texas. This suggests that the house price distribution is closely approximated by the income distribution after a location-scale transformation. The slope of the line changes over time in response to changes in the mortgage market. We argue that this finding is consistent with a simple variant on the permanent income hypothesis. We then explore some of the implications with regard to the evolution of house prices, price-to-income ratios, the efficiency of the housing market, the construction and interpretation of hedonic price indexes for housing, and for public policy.

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Publisher Info
Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2008-13.

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Length: 24 pages
Date of creation: Aug 2008
Date of revision:
Handle: RePEc:swe:wpaper:2008-13

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Related research
Keywords: Real Estate; Permanent income; Mortgage market; Housing bubble; Hedonic index;

Find related papers by JEL classification:
C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
R31 - Urban, Rural, and Regional Economics - - Production Analysis and Firm Location - - - Housing Supply and Markets

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