The Long-Run Relationship between House Prices and Income: Evidence from Local Housing Markets

25 Pages Posted: 6 Aug 2003

See all articles by Joshua Gallin

Joshua Gallin

Federal Reserve Board - Research & Statistics

Multiple version iconThere are 2 versions of this paper

Date Written: April 2003

Abstract

The proposition that "housing prices can't continue to outpace growth in household income" (Wall Street Journal; July 25, 2002) is the received wisdom among many housing-market observers. More formally, many in the housing literature argue that house prices and income are cointegrated. In this paper, I show that the data do not support this view. Standard tests using 27 years of national-level data do not find evidence of cointegration. However, it is known that tests for cointegration have low power, especially in small samples. I use panel-data tests for cointegration that have been shown to be more powerful than their standard time-series counterparts to test for cointegration in a panel of 95 metro areas over 23 years. Using a bootstrap approach to allow for cross-correlations in city-level house-price shocks, I show that even these more powerful tests do not reject the hypothesis of no cointegration. Thus the error-correction specification for house prices and income commonly found in the literature may be inappropriate.

Keywords: House prices, cointegration, panel data

JEL Classification: C22, C23, R22, R31

Suggested Citation

Gallin, Joshua, The Long-Run Relationship between House Prices and Income: Evidence from Local Housing Markets (April 2003). FEDS Working Paper No. 2003-17. Available at SSRN: https://ssrn.com/abstract=410808 or http://dx.doi.org/10.2139/ssrn.410808

Joshua Gallin (Contact Author)

Federal Reserve Board - Research & Statistics ( email )

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