The Binding Credit Constraints and the Welfare Effects of Housing Price Appreciation

Ashot Tsharakyan and Martin Janíčko

Prague Economic Papers, 2010, vol. 2010, issue 4, 359-382

Abstract: The paper deals with some relevant effects of appreciation of housing prices on social and aggregate welfare. As it has been found difficult to assess the current situation given the housing market being the most affected by the crisis, earlier data from 1995 to 2006 have been used. It generalizes previously available results by considering credit constraints together with endogeneity of housing prices. First, housing price appreciation implies improvement in aggregate welfare in a model with exogenous housing price and credit constraints. Then, housing price is endogenized by modelling the supply side of the housing market. In this model, housing price appreciation is caused by supply and demand shocks. The supply shock originates from a change in building permit cost. The demand shifts are generated by changes in household income and interest rates. Both credit-constrained and unconstrained versions of this model are considered. Finally, the combination of observed demand and supply shocks is used to quantify aggregate welfare effects on the US housing market. The results demonstrate that demand shocks dominated during that period and the aggregate welfare improved as a result of housing price appreciation.

Keywords: binding credit constraints; housing price appreciation; social welfare; aggregate welfare; endogenous housing price; demand and supply side shocks (search for similar items in EconPapers)
JEL-codes: R2 R20 R21 R31 (search for similar items in EconPapers)
Date: 2010
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DOI: 10.18267/j.pep.382

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