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Housing Investment: What Makes It so Volatile? Theory and Evidence from OECD Countries

  • Quoc Hung Nguyen

    (Institute of Developing Economies and Hong Kong Institute for Monetary Research)

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    This paper explains how mortgage market liberalization can introduce greater volatility in the housing market. It begins by documenting two stylized facts for OECD countries that models with perfect credit markets fail to explain: (i) housing investment is about five times as volatile as output and (ii) housing investment tends to be more volatile in economies with more liberalized mortgage markets. The paper then develops a DSGE model where households face a credit constraint and housing is used as collateral. This housing collateral constraint creates a link between the housing market and borrowing capacity, a link that amplifies the response of housing demand to shocks and becomes stronger with more mortgage market liberalization. Finally, calibrated models with a housing collateral constraint explain about 90 percent of housing investment volatility in the UK economy.

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    Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 232010.

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    Length: 45 pages
    Date of creation: Sep 2010
    Date of revision:
    Handle: RePEc:hkm:wpaper:232010
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    1. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
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