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Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints

  • Sven Rady
  • François Ortalo-Magné

This paper presents a dynamic theory of housing market fluctuations. It develops a life-cycle model where households are heterogeneous with respect to income and preferences, and mortgage lending is restricted by a down-payment requirement. The market interaction of young credit-constrained households with older or richer unconstrained households generates the following results. (1) Current income of young credit-constrained households affects housing prices independently of aggregate income. (2) Housing prices and the number of housing transactions are positively correlated. (3) Housing prices over-react to income shocks. (4) A relaxation of the down-payment constraint triggers a boom-bust cycle. These results are consistent with patterns observed in the US and the UK.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 470.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_470
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