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Modelling Households’ Savings and Dwellings Investment – A Portfolio Choice Approach

  • Gábor Vadas

    ()

    (Model Development Unit, Conjunctural Assessment and Projections Division, Economics Department, National Bank of Hungary, H-1850 Budapest V: Szabadság tér 8/9)

A house is generally considered as a ‘roof over one’s head’, however, housing can be regarded as an investment or asset. Our paper focuses on this function of dwellings and develops a stochastic portfolio choice model for the housing market, which is easy to incorporate into medium and large-scale macro models. Theoretical results suggest that house prices move in line with households’ income, although house prices have a higher variance than income does. On the other hand the positive correlation between the return on housing investment and consumption not only implies positive relationship between the portfolio share of housing investment and excess return but also renders the housing wealth inappropriate in consumption smoothing. We use UK data to test these theoretical implications of the model. In this case, empirical results strengthen the model framework.

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Article provided by Asian Real Estate Society in its journal International Real Estate Review.

Volume (Year): 7 (2004)
Issue (Month): 1 ()
Pages: 31-55

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Handle: RePEc:ire:issued:v:07:n:01:2004:p:31-55
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  1. Malpezzi, Stephen, 1999. "A Simple Error Correction Model of House Prices," Journal of Housing Economics, Elsevier, vol. 8(1), pages 27-62, March.
  2. Christopher J. Mayer & C. Tsuriel Somerville, 1996. "Unifying empirical and theoretical models of housing supply," Working Papers 96-12, Federal Reserve Bank of Boston.
  3. Muellbauer, John & Murphy, Anthony, 1997. "Booms and Busts in the UK Housing Market," CEPR Discussion Papers 1615, C.E.P.R. Discussion Papers.
  4. James M. Poterba, 1983. "Tax Subsidies to Owner-occupied Housing: An Asset Market Approach," Working papers 339, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  6. Case Karl E. & Quigley John M. & Shiller Robert J., 2005. "Comparing Wealth Effects: The Stock Market versus the Housing Market," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-34, May.
  7. Zoltán M. Jakab & András Mihály Kovács, 2002. "Hungary in the NIGEM model," MNB Working Papers 2002/3, Magyar Nemzeti Bank (the central bank of Hungary).
  8. Nathalie Girouard & Sveinbjörn Blöndal, 2001. "House Prices and Economic Activity," OECD Economics Department Working Papers 279, OECD Publishing.
  9. Ming-Chi Chen & Kanak Patel, 1998. "House Price Dynamics and Granger Causality: An Analysis of Taipei New Dwelling Market," International Real Estate Review, Asian Real Estate Society, vol. 1(1), pages 101-126.
  10. Nigel Pain, 1996. "Modelling Structural Change In The UK Housing Market: A Comparison Of Alternative House Price Models," NIESR Discussion Papers 239, National Institute of Economic and Social Research.
  11. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
  12. Johansen, S., 1991. "Determination of Cointegration Rank in the Presence of a Linear Trend," Papers 76a, Helsinki - Department of Economics.
  13. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
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