Demand Shocks, Price Stickiness and Frequency-Dependent Heterogeneity in Housing Market Dynamics

Abstract

This paper establishes a dynamic stochastic general equilibrium model with second moment shocks and sticky housing price, and compares the heterogeneous macro effects of exogenous uncertainty shocks on housing market dynamics in China from frequency-dependent perspectives. We focus on three types of demand shocks, namely total demand shock, housing preference shock and credit constraint shock. Heterogeneity between the housing and consumption goods sectors is considered to generate different degrees of stickiness in pricing numeric goods and housing. Generally, it is found that housing price dynamics are sensitive to the market setting and housing price stickiness; omitting the price stickiness in the housing market will underestimate the market response to uncertainty shocks, especially in the post-crisis period. Regarding the impact channel of housing price dynamics, it is found that the uncertainties of total demand and preference shocks are important in affecting housing demand, and the impacts of credit constraint shock are important in affecting the mortgage demand. Using wavelet decomposition on both the time and frequency domains, it is found that the macro effects of the above uncertainty shocks present frequency domain dependence and function differently in housing markets with different levels of friction.

Keywords: demand shock; sticky housing price; frequency dependence; China

JEL Classification: R21, E32, D52