Run-up in the House Price-Rent Ratio: How Much Can Be Explained by Fundamentals?
This paper studies the joint dynamics of real house prices and rents over the past decade. We build a dynamic general equilibrium stochastic life cycle model of housing tenure choice with fully speci?ed markets for homeownership and rental properties, and endogenous house prices and rents. Houses are modeled as discrete-size durable goods which provide shelter services, confer access to collateralized borrowing, provide sizeable tax advantages, and generate rental income for homeowners who choose to become landlords. Mortgages are available, but home-buyers must satisfy a minimum down payment requirement, and home sales and purchases are subject to lumpy ad- justment costs. Lower interest rates, relaxed lending standards, and higher incomes are shown to account for over one-half of the increase in the U.S. house price-rent ratio between 1995 and 2005, and to generate the pattern of rapidly growing house prices, sluggish rents, increasing homeownership, and rising household indebtedness observed in the data. The model highlights the importance of accounting for equilib- rium interactions between the markets for owned and rented property when analyzing the housing market. These general equilibrium e¤ects can either magnify or reverse the partial equilibrium e¤ects of changes in fundamentals on house prices, rents, and homeownership.
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- Francois Ortalo-Magne & Sven Rady, 1998.
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9810004, EconWPA, revised 25 Oct 1998.
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- François Ortalo-Magné & Sven Rady, 2006.
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Review of Economic Studies,
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- Sven Rady & François Ortalo-Magné, 2001. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints," CESifo Working Paper Series 470, CESifo Group Munich.
- Ortalo-Magné, François & Rady, Sven, 2005. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraint," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 50, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Sven Rady, 2001. "Housing Market Dynamics: on the Contribution of Income Shocks and Credit Constraints," FMG Discussion Papers dp375, Financial Markets Group.
- Ortalo-Magné, François & Rady, Sven, 2001. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints," CEPR Discussion Papers 3015, C.E.P.R. Discussion Papers.
- François Ortalo-Magné & Sven Rady, 2002. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints," Wisconsin-Madison CULER working papers 02-01, University of Wisconsin Center for Urban Land Economic Research.
- Díaz, Antonia & Luengo Prado, Maria José, 2006.
"The wealth distribution with durable goods,"
UC3M Working papers. Economics
we067027, Universidad Carlos III de Madrid. Departamento de Economía.
- Antonia Diaz & Maria Jose Luengo Prado, 2008.
"On the User Cost and Homeownership,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 584-613, July.
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