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Housing market dynamics: on the contribution of income shocks and credit constraints

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  • Ortalo-Magné, François
  • Randy, Sven

Abstract

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 order 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-but cycle. These results are consistent with patterns observed in the US and the UK.

Suggested Citation

  • Ortalo-Magné, François & Randy, Sven, 2001. "Housing market dynamics: on the contribution of income shocks and credit constraints," LSE Research Online Documents on Economics 25049, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:25049
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    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance
    • J1 - Labor and Demographic Economics - - Demographic Economics

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