From Shirtsleeves to Shirtsleeves in a Long Lifetime

This paper is a quantitatively-oriented theoretical study into the interaction between housing prices, aggregate production, and household behaviour over a lifetime. We develop an overlapping generations model of a production economy in which land and capital are combined into residential and commercial structures. We find that, in the economy where land is more important for structures, the housing price is more sensitive to changes in technology; and, in the steady state, households face a higher house price-rental ratio and buy houses later in life. On the other hand, relaxing collateral constraints has a limited impact on housing prices and aggregate production in the transition to a new steady state, even though it encourages households to buy houses earlier in life, resulting in first order welfare gains.