A Theory of Housing Demand Shocks

41 Pages Posted: 19 Mar 2019

See all articles by Zheng Liu

Zheng Liu

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Pengfei Wang

HKUST, Department of Economics; Hong Kong University of Science & Technology (HKUST) - Department of Economics

Tao A. Zha

Federal Reserve Bank of Atlanta

Multiple version iconThere are 2 versions of this paper

Date Written: March 2019

Abstract

Aggregate housing demand shocks are an important source of house price fluctuations in the standard macroeconomic models, and through the collateral channel, they drive macroeconomic fluctuations. These reduced-form shocks, however, fail to generate a highly volatile price-to-rent ratio that comoves with the house price observed in the data (the “price-rent puzzle”). We build a tractable heterogeneous-agent model that provides a microeconomic foundation for housing demand shocks. The model predicts that a credit supply shock can generate large comovements between the house price and the price-to-rent ratio. We provide empirical evidence from cross-country and cross-MSA data to support this theoretical prediction.

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Suggested Citation

Liu, Zheng and Wang, Pengfei and Zha, Tao A., A Theory of Housing Demand Shocks (March 2019). NBER Working Paper No. w25667. Available at SSRN: https://ssrn.com/abstract=3354320

Zheng Liu (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Pengfei Wang

HKUST, Department of Economics ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China

Tao A. Zha

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-521-8353 (Phone)
404-521-8956 (Fax)

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