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Housing Boom and Bust Cycles

  • Robert F. Martin

    (Board of Governors)

  • Don Schlagenhauf

    (Florida State University)

  • Carlos Garriga

    (Federal Reserve Bank of St. Louis)

This paper describes a quantitative model developed to understand the key determinats of house prices boom-and-bust cycles. The key driving forces behind the boom are residential investment, immigration, current account deficits, relaxation of downpayment constraints, and the elimination of land regulation. Housing supply is comprised by the stock of housing and new construction. The baseline economy considers the housing boom in Spain because its peak surpased the magnitude in the United States by 15 percent. A calibrated version of the model for the Spanish economy replicates the pre-boom aggregates. The model predicts that a change in observed fundamentals can rationalize at least 84 percent of the recent boom in the value of housing capital. Without large current account deficits and demographic changes the size of the housing boom should have been much smaller. With respect to the housing bust, the model suggests that the combination of increasing mortgage rates, unemployment, and low productivity can have large effects in the value of housing capital. Some conservative predictions quantify adjustments that range between 24 and 29 percent. The paper explores the boom-bust cycles in other economies such as the United States and Japan.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1080.

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Date of creation: 2010
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Handle: RePEc:red:sed010:1080
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  1. Mankiw, N. Gregory & Weil, David N., 1989. "The baby boom, the baby bust, and the housing market," Regional Science and Urban Economics, Elsevier, vol. 19(2), pages 235-258, May.
  2. Martin Gervais, 1998. "Housing Taxation and Capital Accumulation," UWO Department of Economics Working Papers 9807, University of Western Ontario, Department of Economics.
  3. Matthew Chambers & Carlos Garriga, 2005. "Accounting for Changes in the Homeownership Rate," Computing in Economics and Finance 2005 304, Society for Computational Economics.
  4. Kiyotaki, Nobuhiro & Michaelides, Alexander & Nikolov, Kalin, 2010. "Winners and Losers in Housing Markets," CEPR Discussion Papers 7953, C.E.P.R. Discussion Papers.
  5. Richard K. Green & Stephen Malpezzi & Stephen K. Mayo, 1999. "Metropolitan-Specific Estimates of the Price Elasticity of Supply of Housing, and Their Sources," Wisconsin-Madison CULER working papers 99-16, University of Wisconsin Center for Urban Land Economic Research.
  6. Libertad Gonzalez & Francesc Ortega, 2013. "Immigration And Housing Booms: Evidence From Spain," Journal of Regional Science, Wiley Blackwell, vol. 53(1), pages 37-59, 02.
  7. Rosen, Harvey S & Rosen, Kenneth T, 1980. "Federal Taxes and Homeownership: Evidence from Time Series," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 59-75, February.
  8. Stijn Van Nieuwerburgh & Pierre-Olivier Weill, 2010. "Why Has House Price Dispersion Gone Up?," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1567-1606.
  9. Uriel Jiménez Ezequiel (ed.), 2009. "El stock de capital en viviendas en España y su distribución territorial (1990-2007)," Books, Fundacion BBVA / BBVA Foundation, edition 0, number 201194.
  10. Chambers, Matthew & Garriga, Carlos & Schlagenhauf, Don E., 2009. "Housing policy and the progressivity of income taxation," Journal of Monetary Economics, Elsevier, vol. 56(8), pages 1116-1134, November.
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