A New Perspective on the Relationship between House Prices and Income

24 Pages Posted: 9 Dec 2008

See all articles by Robert J. Hill

Robert J. Hill

UNSW Australia Business School, School of Economics

Quan Gan

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

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

Hill, Robert James and Gan, Quan, A New Perspective on the Relationship between House Prices and Income (June 16, 2008). UNSW Australian School of Business Research Paper No. 2008 ECON 13. Available at SSRN: https://ssrn.com/abstract=1313073 or http://dx.doi.org/10.2139/ssrn.1313073

Robert James Hill (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Quan Gan

The University of Sydney - Discipline of Finance ( email )

Discipline of Finance
University of Sydney
Sydney, NSW 2006
Australia

HOME PAGE: http://sydney.edu.au/business/staff/quang

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Register to save articles to
your library

Register

Paper statistics

Downloads
203
Abstract Views
1,063
rank
149,589
PlumX Metrics