DP3015 Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints
|Author(s):||François Ortalo-Magné, Sven Rady|
|Publication Date:||October 2001|
|Keyword(s):||credit constraints, financial liberalization, housing prices and transactions, income shocks, overlapping generations|
|JEL(s):||E32, G12, G21, R21|
|Programme Areas:||International Macroeconomics, Financial Economics, Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=3015|
This Paper presents a dynamic theory of housing market fluctuations. It develops a life-cycle model where households are heterogeneous with respect to income and preferences, and mortgage lending is restricted by a down-payment requirement. The market interaction of young credit-constrained households with older or richer unconstrained households generates the following results. (1) Current income of young credit-constrained households affects housing prices independently of aggregate income. (2) Housing prices and the number of housing transactions are positively correlated. (3) Housing prices over-react to income shocks. (4) A relaxation of the down-payment constraint triggers a boom-bust cycle. These results are consistent with patterns observed in the US and the UK.