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Problems for a fundamental theory of house prices

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  • Andreas Hornstein

Abstract

We describe a simple model of the demand for housing and show that on a balanced growth path the rate at which the relative price of housing changes over time is determined by the relative productivity growth rates of the housing sector and the rest of the economy. A calibrated version of the model has only limited success in accounting for the increased rate of house price appreciation since the mid-1990s. We then extend the model to include a collateral constrained consumer. We show that the impact of collateral constraints is limited. Collateral constraints may affect the level of the housing price path, but they do not affect the growth rate of housing prices.

Suggested Citation

  • Andreas Hornstein, 2009. "Problems for a fundamental theory of house prices," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 95(Win), pages 1-24.
    • Handle: RePEc:fip:fedreq:y:2009:i:win:p:1-24:n:v.95no.1
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    References listed on IDEAS

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    1. Zvi Hercowitz & Jeffrey C. Campbell, 2005. "The Role of Collateralized Household Debt in Macroeconomic Stabilization," 2005 Meeting Papers 120, Society for Economic Dynamics.
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    7. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2010. "Winners and Losers in House Markets," Working Papers 2010-5, Central Bank of Cyprus.
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    Cited by:

    1. Grossmann, Volker & Larin, Benjamin & Löfflad, Hans Torben & Steger, Thomas, 2021. "Distributional consequences of surging housing rents," Journal of Economic Theory, Elsevier, vol. 196(C).
    2. Karolien De Bruyne & Jan Van Hove, 2013. "Explaining the spatial variation in housing prices: an economic geography approach," Applied Economics, Taylor & Francis Journals, vol. 45(13), pages 1673-1689, May.
    3. Steger, Thomas Michael & Grossmann, Volker, 2016. "Das House-Kapital: A Theory of Wealth-to-Income Ratios," VfS Annual Conference 2016 (Augsburg): Demographic Change 145936, Verein für Socialpolitik / German Economic Association.
    4. Steger, Thomas & Grossmann, Volker & Larin, Benjamin & Löfflad, Hans Torben, 2019. "Distributional Effects of Surging Housing Costs under Schwabe`s Law of Rent," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203613, Verein für Socialpolitik / German Economic Association.
    5. Katharina Knoll & Moritz Schularick & Thomas Steger, 2017. "No Price Like Home: Global House Prices, 1870-2012," American Economic Review, American Economic Association, vol. 107(2), pages 331-353, February.
    6. Grossmann, Volker & Schäfer, Andreas & Steger, Thomas & Fuchs, Benjamin, 2017. "Reversal of migration flows: A fresh look at the German reunification," Journal of International Economics, Elsevier, vol. 109(C), pages 1-15.
    7. Miles, David & Sefton, James, 2017. "Houses across time and across place," CEPR Discussion Papers 12103, C.E.P.R. Discussion Papers.
    8. Kenneth G. Stewart, 2022. "How important are land values in house price growth? Evidence from Canadian cities," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(1), pages 249-271, February.
    9. Volker Grossmann & Benjamin Larin & Hans Torben Löfflad & Thomas Steger, 2019. "Distributional effects of surging housing costs under Schwabe's Law," CESifo Working Paper Series 7684, CESifo.
    10. KARGI, Bilal, 2013. "Konut Piyasası ve Ekonomik Büyüme İlişkisi: Türkiye Üzerine Zaman Serileri Analizi (2000-2012) [Housing market and economic growth relation: time series analysis over Turkey (2000-2012)]," MPRA Paper 55694, University Library of Munich, Germany.
    11. Miles, David, 2022. "The half life of economic injustice," Economics and Philosophy, Cambridge University Press, vol. 38(1), pages 71-107, March.
    12. Andreas Hornstein, 2009. "Notes on collateral constraints in a simple model of housing," Working Paper 09-03, Federal Reserve Bank of Richmond.
    13. Luigi Bonatti, 2017. "Land, Housing, Growth and Inequality," DEM Working Papers 2017/01, Department of Economics and Management.
    14. Grossmann, Volker & Larin, Benjamin & Steger, Thomas M., 2021. "Das House Kapital," FSES Working Papers 523, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.

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    Keywords

    Housing - Prices;

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