
| Ortalo-Magné, François and Rady, Sven (January 2005): Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints (Revised Version). Discussion Papers in Economics 2005-1 |
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We propose a life-cycle model of the housing market with a property ladder and a credit constraint. We focus on equilibria which replicate the facts that credit constraints delay some households' first home purchase and force other households to buy a home smaller than they would like. The model helps us identify a powerful driver of the housing market: the ability of young households to afford the down payment on a starter home, and in particular their income. The model also highlights a channel whereby changes in income may yield housing price overshooting, with prices of trade-up homes displaying the most volatility, and a positive correlation between housing prices and transactions. This channel relies on the capital gains or losses on starter homes incurred by credit-constrained owners. We provide empirical support for our arguments with evidence from both the U.K. and the U.S.
| Item Type: | Paper (Discussion Paper) |
|---|---|
| Published in: | Review of Economic Studies, No. 2, Vol. 73, 2006: pp. 459-85. |
| Keywords: | Housing Demand ; Income Fluctuations ; Overlapping Generations ; Collateral Constraint |
| Subjects: | Economics Economics > Discussion Papers in Economics |
| Dewey Classification: | 300 Social sciences 300 Social sciences > 330 Wirtschaft |
| Journal of Economic Literature classification: | E32, G12, G21, R21 |
| URN: | urn:nbn:de:bvb:19-epub-494-0 |
| Language: | English |
| ID Code: | 494 |
| Deposited On: | 13. Apr 2005 |
| Last Modified: | 28. Jun 2010 14:28 |