Housing Market Dynamics

Rady, Sven and Ortalo-Magné, François (April 2001): Housing Market Dynamics. On the Contribution of Income Shocks and Credit Constraints. Discussion Papers in Economics 2001-9 Review of Economic Studies, 73

Abstract

This paper presents a dynamic theory of housing market fluctuations. It develops a life-cycle model where households are heterogeneous with respect to income and preferences, and mortgage lending is restricted by a down-payment requirement. The market interaction of young credit-constrained households with older or richer unconstrained households generates the following results. (1) Current income of young credit-constrained households affects housing prices independently of aggregate income. (2) Housing prices and the number of housing transactions are positively correlated. (3) Housing prices over-react to income shocks. (4) A relaxation of the down-payment constraint triggers a boom-bust cycle. These results are consistent with patterns observed in the US and the UK.

• Item Type: Paper
• Keywords: Housing Demand ; Income Fluctuations ; Overlapping Generations ; Collateral Constraint
• Faculties: Economics; Economics > Munich Discussion Papers in Economics; Economics > Munich Discussion Papers in Economics > Micro-Economics; Economics > Munich Discussion Papers in Economics > Industrial Organization; Economics > Chairs > Chair of Dynamic Economic Theory (closed)
• Subjects: 300 Social sciences > 300 Social sciences, sociology and anthropology; 300 Social sciences > 330 Economics
• JEL Classification: E32, G12, G21, R21
• Language: English