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Boom In, Bust Out: Young Households and the Housing Price Cycle

Author

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  • Francois Ortalo-Magne

    (London School of Economics)

  • Sven Rady

    (Graduate School of Business, Stanford University)

Abstract

The UK experienced a major residential real estate boom-bust cycle from the mid-Eighties to the mid-Nineties, accompanied by unprecedented shifts in the owner occupancy rate of young households. Previous empirical analyses have pointed toward income changes and financial deregulation as the likely causes of this episode, with little to say about the differential effects on various age groups. We show that, in a life-cycle model with income heterogeneity and credit constraints, the observed co-movements of housing prices and owner occupancy rates can be explained as an equilibrium response to income and credit market shocks. Our findings suggest that the financial liberalisation of the early Eighties was crucial for the unparalleled increase in the owner occupancy rate of young households during the boom.

Suggested Citation

  • Francois Ortalo-Magne & Sven Rady, 1998. "Boom In, Bust Out: Young Households and the Housing Price Cycle," Finance 9810004, University Library of Munich, Germany, revised 29 Oct 1998.
    • Handle: RePEc:wpa:wuwpfi:9810004
    Note: Type of Document - Acrobat PDF; prepared on PC; pages: 10 ; figures: included. Prepared for Session B1, "Theories of Money, Credit and Aggregate Economic Activity" (organized by Nobuhiro Kiyotaki, London School of Economics), at the 13th Annual Congress of the European Economic Association, Berlin, September 1998.
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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