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Housing Market Fluctuations in a Life-Cycle Economy with Credit Constraints

Listed author(s):
  • Sven Rady

This paper presents a first step towards a new theory of housing market fluctuations. We develop a life-cycle model where agents face credit constraints and their housing consumption is restricted to a discrete set of possibilities. The market interaction of young credit constrained agents climbing the property ladder with old agents trading down, generates co-movements of aggregate house prices, volume of transactions and income, consistent with the patterns observed in the U.S and the UK Under plausible assumptions the model reproduces the slight lead of transaction volume over the other two series as documented in the data. Our theory asserts that the fluctuations in housing prices depend crucially on fluctuation in the current income of young household the first-time buyers). Thus, it sheds light on why housing prices are more volatile than GDP, and why they exhibit some degree of predictability in a market where households optimise over the timing of their transaction.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp296.pdf
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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp296.

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Date of creation: Jun 1998
Handle: RePEc:fmg:fmgdps:dp296
Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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  1. Richard K. Green & Patric H. Hendershott, 1995. "Age, Housing Demand, and Real House Prices," Wisconsin-Madison CULER working papers 96-09, University of Wisconsin Center for Urban Land Economic Research.
  2. John Moore & Nobuhiro Kiyotaki, "undated". "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  3. Duca, John V. & Rosenthal, Stuart S., 1994. "Borrowing constraints and access to owner-occupied housing," Regional Science and Urban Economics, Elsevier, vol. 24(3), pages 301-322, June.
  4. Grossman, Sanford J & Laroque, Guy, 1990. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," Econometrica, Econometric Society, vol. 58(1), pages 25-51, January.
  5. Lawrence D. Jones, 1989. "Current Wealth and Tenure Choice," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(1), pages 17-40.
  6. Francois Ortalo-Magne & Sven Rady, 1998. "Boom In, Bust Out: Young Households and the Housing Price Cycle," Finance 9810004, EconWPA, revised 25 Oct 1998.
  7. Ioannides, Yannis M., 1989. "Housing, other real estate, and wealth portfolios : An empirical investigation based on the 1983 Survey of Consumer Finances," Regional Science and Urban Economics, Elsevier, vol. 19(2), pages 259-280, May.
  8. Jones, Lawrence D., 1997. "The Tenure Transition Decision For Elderly Homeowners," Journal of Urban Economics, Elsevier, vol. 41(2), pages 243-263, March.
  9. Engelhardt, Gary V, 1996. "Consumption, Down Payments, and Liquidity Constraints," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 255-71, May.
  10. Jeremy C. Stein, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 379-406.
  11. DiPasquale Denise & Wheaton William C., 1994. "Housing Market Dynamics and the Future of Housing Prices," Journal of Urban Economics, Elsevier, vol. 35(1), pages 1-27, January.
  12. Peter Linneman & Susan Wachter, 1989. "The Impacts of Borrowing Constraints on Homeownership," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(4), pages 389-402.
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