On the importance of borrowing constraints for house price dynamics

Essi Eerola () and Niku Määttänen ()
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Essi Eerola: University of Helsinki and HECER, http://www.valt.helsinki.fi/blogs/eerola/
Niku Määttänen: The Research Institute of the Finnish Economy, http://staff.etla.fi/maattanen/

No 8/2008, Research Discussion Papers from Bank of Finland

Abstract: We study how a household borrowing constraint the the form of a down payment requirement affects house price dynamics in an OLG model with standard preferences. We find that in certain situations the borrowing constraint shapes house price dynamics substantially. The importance of the constraint depends very much on whether house price changes are driven by interest rate or aggregate income shocks. Moreover, because of the borrowing constraint, house price dynamics display substantial asymmetries between large positive and large negative income shocks. These results are related to the fact that the share of borrowing-constrained households is different following different shocks.

Keywords: house prices; dynamics; borrowing constraints; down payment constraint (search for similar items in EconPapers)
JEL-codes: E21 R21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge, nep-geo, nep-mac and nep-ure
Date: Written 2008-03-17
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