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Error correction dynamics of house prices: an equilibrium benchmark

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  • Charles Ka Yui Leung

Abstract

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.

Suggested Citation

  • Charles Ka Yui Leung, 2014. "Error correction dynamics of house prices: an equilibrium benchmark," Globalization Institute Working Papers 177, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddgw:177
    DOI: 10.24149/gwp177
    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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    More about this item

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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