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Markets where buyers also are sellers. How realized home equity may work as an accelerator of house prices

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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.

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  • Erling Røed Larsen, 2010. "Markets where buyers also are sellers. How realized home equity may work as an accelerator of house prices," Discussion Papers 618, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:618
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    File URL: https://www.ssb.no/a/publikasjoner/pdf/DP/dp618.pdf
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    Keywords

    capital gains; consumer behavior; endowment income; feedback system; financial acceleration; home equity; housing; instability; interdependence;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D10 - Microeconomics - - Household Behavior - - - General
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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