Rational housing demand bubble

Lise Clain-Chamoset-Yvrard (), Xavier Raurich and Thomas Seegmuller
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Lise Clain-Chamoset-Yvrard: Université Lumière Lyon 2
Thomas Seegmuller: Aix-Marseille Univ., CNRS, AMSE

Economic Theory, 2024, vol. 77, issue 3, No 5, 699-746

Abstract: Abstract We provide a unified framework with demand for housing over the life cycle and financial frictions to analyze the existence and macroeconomic effects of rational housing bubbles. We distinguish a housing price bubble, defined as the difference between the housing market price and its fundamental value, from a housing demand bubble, which corresponds to a situation where a pure speculative housing demand exists. In an overlapping generation exchange economy, we show that no housing price bubble occurs. However, a housing demand bubble may occur, generating a boom in housing prices and a drop in the interest rate, when households face a binding borrowing constraint. The multiplicity of steady states and endogenous fluctuations can occur when credit market imperfections are moderate. These fluctuations involve transitions between equilibria with and without a housing demand bubble that generate large fluctuations in housing prices consistent with observed patterns. We finally extend the basic framework to a production economy and we show that a housing demand bubble increases housing prices, which can still be characterized by large fluctuations.

Keywords: Bubble; Housing; Self-fulfilling fluctuations (search for similar items in EconPapers)
JEL-codes: E32 E44 R21 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Rational housing demand bubble (2024)
Working Paper: Rational housing demand bubble (2022)
Working Paper: Rational housing demand bubble (2022)
Working Paper: Rational housing demand bubble (2022)
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DOI: 10.1007/s00199-023-01501-4

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