House Price Fluctuations and Residential Sorting

59 Pages Posted: 5 Jul 2009

See all articles by Markus Haavio

Markus Haavio

Bank of Finland - Research

Heikki Kauppi

University of Turku - Department of Economics; Bank of Finland - Research; University of Helsinki - Department of Political and Economic Studies

Date Written: June 30, 2009

Abstract

Empirical evidence suggests that local jurisdictions are internally more heterogeneous than standard sorting models predict. We develop a dynamic multi-region model, with fluctuating regional house prices, where an owner-occupying household’s location choice depends on its current wealth and its current ‘match’ and involves both consumption and investment considerations. The relative weights of the consumption and investment motives in the location choice determine the equilibrium pattern of residential sorting, with a strong investment (consumption) motive implying sorting according to match (wealth). The model predicts a negative relation between size of house price fluctuations and residential sorting in the match dimension. Also movers should be more sorted than stayers. These predictions are consistent with evidence from US metropolitan areas when income, age and education are used as proxies for the match.

Keywords: residential sorting, house prices, incomplete markets, owner-occupation, household mobility

JEL Classification: D31, D52, R13, R21, R23

Suggested Citation

Haavio, Markus and Kauppi, Heikki, House Price Fluctuations and Residential Sorting (June 30, 2009). Bank of Finland Research Discussion Paper No. 14/2009, Available at SSRN: https://ssrn.com/abstract=1429334 or http://dx.doi.org/10.2139/ssrn.1429334

Markus Haavio (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

Heikki Kauppi

University of Turku - Department of Economics ( email )

20014 Turku
Finland

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

University of Helsinki - Department of Political and Economic Studies

P.O. Box 54
FIN-00014 Helsinki
Finland

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