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On the importance of borrowing constraints for house price dynamics

  • Eerola, Essi


    (Government Institute for Economic Research)

  • Määttänen, Niku


    (The Research Institute of the Finnish Economy)

We study how a household borrowing constraint the the form of a down payment requirement affects house price dynamics in an OLG model with standard preferences. We find that in certain situations the borrowing constraint shapes house price dynamics substantially. The importance of the constraint depends very much on whether house price changes are driven by interest rate or aggregate income shocks. Moreover, because of the borrowing constraint, house price dynamics display substantial asymmetries between large positive and large negative income shocks. These results are related to the fact that the share of borrowing-constrained households is different following different shocks.

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Paper provided by Bank of Finland in its series Research Discussion Papers with number 8/2008.

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Length: 40 pages
Date of creation: 17 Mar 2008
Date of revision:
Handle: RePEc:hhs:bofrdp:2008_008
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
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  1. Morris A. Davis, 2010. "housing and the business cycle," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
  2. Francois Ortalo-Magne & Sven Rady, 1998. "Boom In, Bust Out: Young Households and the Housing Price Cycle," Finance 9810004, EconWPA, revised 25 Oct 1998.
  3. Markus K. Brunnermeier & Christian Julliard, 2008. "Money Illusion and Housing Frenzies," Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 135-180, January.
  4. José-Víctor Ríos-Rull & Virginia Sánchez-Marcos, 2008. "An Aggregate Economy with Different Size Houses," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 705-714, 04-05.
  5. Sven Rady, 2001. "Housing Market Dynamics: on the Contribution of Income Shocks and Credit Constraints," FMG Discussion Papers dp375, Financial Markets Group.
  6. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-37, March.
  7. Gervais, Martin, 2002. "Housing taxation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1461-1489, October.
  8. Owen Lamont & Jeremy C. Stein, 1997. "Leverage and House-Price Dynamics in U.S. Cities," NBER Working Papers 5961, National Bureau of Economic Research, Inc.
  9. Benito, Andrew, 2006. "The down-payment constraint and UK housing market: Does the theory fit the facts?," Journal of Housing Economics, Elsevier, vol. 15(1), pages 1-20, March.
  10. Jonathan Heathcote, 2003. "Housing and the Business Cycle," Working Papers gueconwpa~03-03-21, Georgetown University, Department of Economics.
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