A mechanism for booms and busts in housing prices

Marten Hillebrand and Tomoo Kikuchi

Journal of Economic Dynamics and Control, 2015, vol. 51, issue C, 204-217

Abstract: The paper studies the dynamics of housing prices in a pure exchange overlapping generations framework a la Samuelson (1958) and Gale (1973), which is extended to include housing as a utility-yielding durable good and a credit sector. We completely characterize the equilibrium dynamics, which alternates between an expansive regime where leveraged borrowing increases housing prices, and a contractive regime where these variables decrease. Regime switches occur due to small but persistent income changes giving rise to boom-bust cycles in housing prices. Price deviations from fundamentals are caused by leveraged borrowing, and turn out to be fully welfare-neutral.

Keywords: Pure exchange OLG; Housing prices; Credit volume; Boom-bust cycles; Regime switching (search for similar items in EconPapers)
JEL-codes: C62 E32 G21 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (11)

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Related works:
Working Paper: A mechanism for booms and busts in housing prices (2012)
Working Paper: A Mechanism for Booms and Busts in Housing Prices (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:51:y:2015:i:c:p:204-217

DOI: 10.1016/j.jedc.2014.09.033

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