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Rational Housing Bubble


  • Bo Zhao


This paper studies an economy inhabited by overlapping generations of homeowners and investors, with the only difference between the two being that homeowners derive utility from housing services whereas investors do not. Tight collateral constraint limits the borrowing capacity of homeowners and drives the equilibrium interest rate level down to the housing price growth rate, which makes housing attractive as a store of value for investors. As long as the rental market friction is high enough, the investors will hold a positive number of vacant houses in equilibrium. A housing bubble arises in an equilibrium in which investors hold houses for resale purposes only and without the expectation of receiving a dividend either in terms of utility or rent. The model can be applied to China, where the housing bubble can be attributed to the rapid decline in the replacement rate of the pension system.

Suggested Citation

  • Bo Zhao, 2013. "Rational Housing Bubble," NBER Working Papers 19354, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19354
    Note: AP

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    References listed on IDEAS

    1. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2006. "Bubbles and capital flow volatility: Causes and risk management," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 35-53, January.
    2. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467-467.
    3. Jianjun Miao & PENGFEI WANG, 2011. "Bubbles and Credit Constraints," Boston University - Department of Economics - Working Papers Series WP2011-031, Boston University - Department of Economics.
    4. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," American Economic Review, American Economic Association, vol. 98(1), pages 358-393, March.
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    Cited by:

    1. Eva Zamrazilová & Václav Žďárek, 2014. "Two Czech crises revisited: pantarhei," Chapters,in: Financial Cycles and the Real Economy, chapter 8, pages 114-144 Edward Elgar Publishing.
    2. Miao, Jianjun & Wang, Pengfei, 2014. "Sectoral bubbles, misallocation, and endogenous growth," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 153-163.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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