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Sticky Rents and the Stability of Housing Cycles

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  • Erdem Basci
  • Ismail Saglam

Abstract

This paper presents a simple model of housing cycles in a two good economy. We establish that nonsubstitutability between housing services and other commodities along with high degree of heterogeneity in home ownership may lead to a stable spiral path converging to a steady-state equilibrium of rental price and housing stock. Key conditions for stability are a sufficiently sticky rent adjustment dynamics and a relatively rapid depreciation of per capita housing stock.

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Bibliographic Info

Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 0902.

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Date of creation: 2009
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Handle: RePEc:tcb:wpaper:0902

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Keywords: Housing cycles; Sticky rents; Stability of equilibrium; Leontief utility;

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  1. Shiller, Robert J, 1990. "Speculative Prices and Popular Models," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 55-65, Spring.
  2. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 647-66, September.
  3. Monika Piazzesi & Martin Schneider & Selale Tuzel, 2006. "Housing, Consumption, and Asset Pricing," NBER Working Papers 12036, National Bureau of Economic Research, Inc.
  4. Erdem Basci & Ismail Saglam, 2008. "On Roots of Housing Bubbles," Working Papers, TOBB University of Economics and Technology, Department of Economics 0801, TOBB University of Economics and Technology, Department of Economics.
  5. Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
  6. Mankiw, N Gregory, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(2), pages 529-38, May.
  7. Dusansky, Richard & Koc, Cagatay, 2007. "The capital gains effect in the demand for housing," Journal of Urban Economics, Elsevier, vol. 61(2), pages 287-298, March.
  8. Kenny, Geoff, 1999. "Modelling the demand and supply sides of the housing market: evidence from Ireland1," Economic Modelling, Elsevier, vol. 16(3), pages 389-409, August.
  9. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
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