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

22 Pages Posted: 20 Nov 2006

See all articles by Joshua Gallin

Joshua Gallin

Federal Reserve Board - Research & Statistics

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Abstract

Many in the housing literature argue that house prices and income are cointegrated. 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, standard tests for cointegration have low power, especially in small samples. I use panel-data tests for cointegration that are more powerful than their 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.

Suggested Citation

Gallin, Joshua, The Long-Run Relationship between House Prices and Income: Evidence from Local Housing Markets. Real Estate Economics, Vol. 34, No. 3, pp. 417-438, Fall 2006. Available at SSRN: https://ssrn.com/abstract=945542 or http://dx.doi.org/10.1111/j.1540-6229.2006.00172.x

Joshua Gallin (Contact Author)

Federal Reserve Board - Research & Statistics ( email )

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