Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints
54 Pages Posted: 8 Nov 2001
There are 3 versions of this paper
Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints
Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints
Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints
Date Written: October 2001
Abstract
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.
Keywords: Housing prices and transactions, credit constraints, income shocks, financial liberalization, overlapping generations
JEL Classification: E32, G12, G21, R21
Suggested Citation: Suggested Citation
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