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Error correction dynamics of house prices: An equilibrium benchmark

Charles Leung

Journal of Housing Economics, 2014, vol. 25, issue C, 75-95

Abstract: Central to recent debates on the “mis-pricing” in the housing market and the proactive policy of central bank is the determination of the “fundamental house price.” This paper builds a dynamic stochastic general equilibrium (DSGE) model that produces reduced-form dynamics that are consistent with the error-correction models proposed by Malpezzi (1999) and Capozza et al. (2004). The dynamics of equilibrium house prices are tied to the dynamics of the house-price-to-income ratio. This paper also shows that house prices and incomes should be co-integrated, and hence provides a justification of using co-integration tests to detect possible “mis-pricing” in the housing market.

Keywords: Fundamental house price; Error-correction model; Cointegration; House price-to-income ratio; Endogenous house price and income (search for similar items in EconPapers)
JEL-codes: E30 O40 R30 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (38)

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Working Paper: Error Correction Dynamics of House Prices: an Equilibrium Benchmark (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jhouse:v:25:y:2014:i:c:p:75-95

DOI: 10.1016/j.jhe.2014.05.001

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