Owner-Occupied Housing as an Investment, Regional House Price Cycles and Residential Sorting

88 Pages Posted: 14 Jan 2012

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: December 20, 2011

Abstract

We develop a dynamic multi-region model, with fluctuating regional house prices, where an owner-occupied household’s location choice depends on its current wealth and its current type and involves both consumption and investment considerations. The relative strength of the consumption motive and the investment motive in the location choice determines the equilibrium pattern of residential sorting, with a strong investment (consumption) motive implying sorting according to the type (wealth). The model predicts a negative relation between the size of house price fluctuations and the degree of residential sorting in the type dimension. Also, movers should be more sorted than stayers in the type dimension. These predictions are consistent with evidence from US metropolitan areas when income, education and age are used as proxies for household type.

Keywords: residential sorting, house prices, consumption motive, investment motive, incomplete markets, household mobility

JEL Classification: D52, G11, R13, R21, R23

Suggested Citation

Haavio, Markus and Kauppi, Heikki, Owner-Occupied Housing as an Investment, Regional House Price Cycles and Residential Sorting (December 20, 2011). Bank of Finland Research Discussion Paper No. 24/2011, Available at SSRN: https://ssrn.com/abstract=1984655 or http://dx.doi.org/10.2139/ssrn.1984655

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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