Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints (Revised Version)

Francois Ortalo-Magne and Sven Rady

Discussion Papers in Economics from University of Munich, Department of Economics

Abstract: 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.

Keywords: Housing Demand; Income Fluctuations; Overlapping Generations; Collateral Constraint (search for similar items in EconPapers)
JEL-codes: E32 G12 G21 R21 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-dge, nep-fin, nep-geo, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

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