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Housing Market Dynamics

Author

Listed:
  • Rady, Sven
  • Ortalo-Magné, François

Abstract

This paper presents a dynamic theory of housing market fluctuations. It develops a life-cycle model where households are heterogeneous with respect to income and preferences, and mortgage lending is restricted by a down-payment requirement. The market interaction of young credit-constrained households with older or richer unconstrained households generates the following results. (1) Current income of young credit-constrained households affects housing prices independently of aggregate income. (2) Housing prices and the number of housing transactions are positively correlated. (3) Housing prices over-react to income shocks. (4) A relaxation of the down-payment constraint triggers a boom-bust cycle. These results are consistent with patterns observed in the US and the UK.

Suggested Citation

  • Rady, Sven & Ortalo-Magné, François, 2001. "Housing Market Dynamics," Discussion Papers in Economics 20, University of Munich, Department of Economics.
  • Handle: RePEc:lmu:muenec:20
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    File URL: https://epub.ub.uni-muenchen.de/20/1/0109_rady.pdf
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    Citations

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    Cited by:

    1. Morris A. Davis, 2010. "housing and the business cycle," The New Palgrave Dictionary of Economics,, Palgrave Macmillan.
    2. Campbell, John Y. & Cocco, Joao F., 2007. "How do house prices affect consumption? Evidence from micro data," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 591-621, April.
    3. Caterina Mendicino, 2006. "Credit Market and Macroeconomic Volatility," 2006 Meeting Papers 317, Society for Economic Dynamics.
    4. Lok Sang Ho & Gary Wai‐Chung Wong, 2006. "Privatization Of Public Housing: Did It Cause The 1998 Recession In Hong Kong?," Contemporary Economic Policy, Western Economic Association International, vol. 24(2), pages 262-273, April.
    5. Gordon W. Crawford & Michael C. Fratantoni, 2003. "Assessing the Forecasting Performance of Regime‐Switching, ARIMA and GARCH Models of House Prices," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(2), pages 223-243, June.
    6. John Y. Campbell & João F. Cocco, 2003. "Household Risk Management and Optimal Mortgage Choice," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1449-1494.
    7. Yoshida, Jiro, 2007. "Technology Shocks and Asset Price Dynamics: The Role of Housing in General Equilibrium," MPRA Paper 6271, University Library of Munich, Germany.
    8. Jeffrey Fisher & Dean Gatzlaff & David Geltner & Donald Haurin, 2004. "An Analysis of the Determinants of Transaction Frequency of Institutional Commercial Real Estate Investment Property," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(2), pages 239-264, June.
    9. Juan Ayuso & Fernando Restoy, 2003. "House prices and rents: an equilibrium asset pricing approach," Working Papers 0304, Banco de España.
    10. Sven Rady & Volker Rußig, 2004. "Fluktuationen des Wohnimmobilienmarktes : mikroökonomische Grundlagen und makroökonomische Auswirkungen ; Forschungsvorhaben i. A. des Bayerischen Staatsministeriums für Wirtschaft, Verkehr und Techno," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 23.
    11. Ortalo-Magne, Francois & Rady, Sven, 2004. "Housing transactions and macroeconomic fluctuations: a case study of England and Wales," Journal of Housing Economics, Elsevier, vol. 13(4), pages 287-303, December.
    12. Jorge Martínez Pagés & Luis Ángel Maza, 2003. "Analysis of house prices in Spain," Working Papers 0307, Banco de España.
    13. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
    14. Ivan Jaccard, 2007. "Real Estate Prices in Production Economies," 2007 Meeting Papers 645, Society for Economic Dynamics.
    15. Juan Ayuso & Fernando Restoy, 2006. "House prices and rents in Spain: does the discount factor matter?," Working Papers 0609, Banco de España.
    16. Lee, Nai Jia & Ong, Seow Eng, 2005. "Upward mobility, house price volatility, and housing equity," Journal of Housing Economics, Elsevier, vol. 14(2), pages 127-146, June.
    17. Jin, Yi & Zeng, Zhixiong, 2004. "Residential investment and house prices in a multi-sector monetary business cycle model," Journal of Housing Economics, Elsevier, vol. 13(4), pages 268-286, December.
    18. Ayuso, Juan & Restoy, Fernando, 2006. "House prices and rents: An equilibrium asset pricing approach," Journal of Empirical Finance, Elsevier, vol. 13(3), pages 371-388, June.
    19. Job Swank & Jan Kakes & Alexander F. Tieman, 2002. "The housing ladder, taxation, and borrowing constraints," MEB Series (discontinued) 2002-9, Netherlands Central Bank, Monetary and Economic Policy Department.

    More about this item

    Keywords

    Housing Demand ; Income Fluctuations ; Overlapping Generations ; Collateral Constraint;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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