A New Perspective on the Relationship between House Prices and Income
24 Pages Posted: 9 Dec 2008
Date Written: June 16, 2008
Abstract
We show that a strong linear relationship exists between income and house price quantiles in Sydney (Australia), Houston, and the state of Texas. This suggests that the house price distribution is closely approximated by the income distribution after a location-scale transformation. The slope of the line changes over time in response to changes in the mortgage market. We argue that this finding is consistent with a simple variant on the permanent income hypothesis. We then explore some of the implications with regard to the evolution of house prices, price-to-income ratios, the efficiency of the housing market, the construction and interpretation of hedonic price indexes for housing, and for public policy.
Keywords: Real Estate, Permanent income, Mortgage market, Housing bubble, Hedonic index
JEL Classification: C43, E01, E31, G12, R31
Suggested Citation: Suggested Citation
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