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Error correction dynamics of house prices: an equilibrium benchmark

  • Leung, Charles Ka Yui

    (City University of Hong Kong)

Central to recent debates on the "mis-pricing" in the housing market and the proactive policy of central bank is the determination of the "fundamental house price." This paper builds a dynamic stochastic general equilibrium (DSGE) model that produces reduced-form dynamics that are consistent with the error-correction models proposed by Malpezzi (1999) and Capozza et al (2004). The dynamics of equilibrium house prices are tied to the dynamics of the house-price-to-income ratio. This paper also shows that house prices and incomes should be co-integrated, and hence provides a justification of using co-integration tests to detect possible "mis-pricing" in the housing market.

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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 177.

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Length: 63 pages
Date of creation: 13 May 2014
Date of revision:
Handle: RePEc:fip:feddgw:177
Note: Published as: Leung, Charles Ka Yui (2014), "Error Correction Dynamics of House Prices: An Equilibrium Benchmark," Journal of Housing Economics 25: 75-95.
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