Markets where buyers also are sellers. How realized home equity may work as an accelerator of house prices
The house price level is a function of buyers’ realized home equity, and buyers’ realized home equity is a function of the house price level. This interdependence follows from the fact that buyers are sellers in the same market. This article examines under what conditions this leads to a possible upward-sloping demand curve with a potentially unstable equilibrium. I employ a parsimonious model with two kinds of buyers, and utilize an augmented Slusky-equation that decomposes Walrasian demand into a substitution, an income, and an endowment income effect. The model demonstrates that instability may occur if first-time buyers’ demand is sufficiently inelastic, leverage is stretched, debt-financing is common, and nth-time buyers are relatively more frequent than first-time buyers. Regulation on leverage and a capital gains tax reduce the likelihood of upward-sloping demand. The article utilizes new data from Norway to examine an empirical indicator of an equity accelerator of house prices and finds that over the period 2000-2008 the value of all housing transactions exceeded the aggregate net growth of mortgages by 50%, indicating substantial equity financing. In one year, 2008, the value of aggregate housing transactions was double the growth in net mortgages.
|Date of creation:||May 2010|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (+47) 21 09 00 00
Fax: (+47) 21 09 49 73
Web page: http://www.ssb.no/en/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:ssb:dispap:618. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (J Bruusgaard)
If references are entirely missing, you can add them using this form.