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A theory of housing demand shocks

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  • Dong, Ding
  • Liu, Zheng
  • Wang, Pengfei
  • Zha, Tao

Abstract

Housing demand shocks in standard macroeconomic models are a primary source of house price fluctuations, but those models have difficulties in generating the observed large volatility of house prices relative to rents. We provide a microeconomic foundation for the reduced-form housing demand shocks with a tractable heterogenous-agent framework. In our model with heterogeneous beliefs, an expansion of credit supply raises housing demand of optimistic buyers and boosts house prices without affecting rents. A credit supply shock also leads to a positive correlation between house trading volumes and house prices. The theoretical mechanism and model predictions are supported by empirical evidence, and the results are robust to alternative specifications of heterogeneity.

Suggested Citation

  • Dong, Ding & Liu, Zheng & Wang, Pengfei & Zha, Tao, 2022. "A theory of housing demand shocks," Journal of Economic Theory, Elsevier, vol. 203(C).
  • Handle: RePEc:eee:jetheo:v:203:y:2022:i:c:s0022053122000746
    DOI: 10.1016/j.jet.2022.105484
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. A Theory of Housing Demand Shocks
      by Christian Zimmermann in NEP-DGE blog on 2019-10-23 19:41:14

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    3. Ma, Xutao & Zhang, Zhen, 2022. "Expectations, credit conditions, and housing boom-bust: Evidence from SVAR with sign and zero restrictions," Journal of Banking & Finance, Elsevier, vol. 134(C).
    4. Margaret Jacobson, 2019. "Beliefs, Aggregate Risk, and the U.S. Housing Boom," 2019 Meeting Papers 1549, Society for Economic Dynamics.
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    8. J. Scott Davis & Kevin X. D. Huang & Ayse Sapci, 2020. "Imperfect substitution in real estate markets and the effect of housing demand on corporate investment," Vanderbilt University Department of Economics Working Papers 20-00002, Vanderbilt University Department of Economics.
    9. Laura Bakkensen & Toan Phan & Russell Wong, 2023. "Leveraging the Disagreement on Climate Change: Theory and Evidence," Working Paper 23-01, Federal Reserve Bank of Richmond.

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    More about this item

    Keywords

    Housing demand; House prices; Price-rent ratio; Heterogeneous beliefs; Credit constraints;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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