Borrowing Constraints and House Price Dynamics: The Case of Large Shocks

Essi Eerola and Niku Määttänen

Studies in Nonlinear Dynamics & Econometrics, 2012, vol. 16, issue 3, 36

Abstract: We study how household borrowing constraints shape house price dynamics. We consider the fully non-linear dynamics following large aggregate shocks in a calibrated OLG model with standard preferences. We find that the main effect of a down payment constraint is to make house price dynamics asymmetric between large positive and large negative income shocks: prices increase rapidly following the impact effect of a large adverse income shock but decline slowly following the impact effect of a positive income shock. This asymmetry stems from the fact that the share of borrowing constrained households changes over time. However, the down payment constraint does not substantially magnify the impact effect of adverse income or interest rate shocks.

Date: 2012
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DOI: 10.1515/1558-3708.1888

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