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Revisiting the House Price-Income Relationship

Author

Listed:
  • Elias Oikarinen
  • Steven Bourassa
  • Martin Hoesli
  • Janne Engblom

Abstract

We undertake a systematic analysis of the relationship between house prices and personal income using data for the 50 largest U.S. Metropolitan Statistical Areas (MSAs). We apply state-of-the-art panel data analysis tools, define income in multiple ways, allow for regional heterogeneity, and control for spatial dependence and endogeneity. We find that the house price-income ratio is not stable in the long run for most cities. In contrast, panel regression models that allow for regional heterogeneity and control for cross-sectional dependence yield stationary equations for MSA house prices. Among other findings, we show that relying on panel unit root tests is problematic. We also show that it is important to allow for heterogeneity across locations and to cater for endogeneity and cross-sectional dependence when analyzing the relationship between house prices and income.

Suggested Citation

  • Elias Oikarinen & Steven Bourassa & Martin Hoesli & Janne Engblom, 2017. "Revisiting the House Price-Income Relationship," ERES eres2017_173, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2017_173
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    More about this item

    Keywords

    cross-sectional dependence; House Prices; Panel Data; personal income; regional heterogeneity;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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