Implications of intertemporal optimization for house and land prices

Christopher Tsoukis and Ahmed Alyousha

Applied Economics, 1999, vol. 31, issue 12, 1565-1571

Abstract: The Euler equation is used for the intertemporal allocation of durable goods in conjunction with a simple model of housing flow supply to derive implications for the relation between house and land prices. Data from England and Wales fails a key time series test in this respect. The rejection of the theory is shown to be mainly due to the specification of the housebuilding industry: perfect competition makes house prices cointegrated with land prices and housebuilding costs. There is also evidence that borrowing constraints impair the validity of the representative-agent framework for the housing sector.

Date: 1999
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DOI: 10.1080/000368499323085

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