Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints

Sven Rady and Ortalo-Magné, François
Authors registered in the RePEc Author Service: Francois Ortalo-Magne

No 3015, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper presents a dynamic theory of housing market fluctuations. It develops a life-cycle model where households are heterogeneous with respect to income and preferences, and mortgage lending is restricted by a down-payment requirement. The market interaction of young credit-constrained households with older or richer unconstrained households generates the following results. (1) Current income of young credit-constrained households affects housing prices independently of aggregate income. (2) Housing prices and the number of housing transactions are positively correlated. (3) Housing prices over-react to income shocks. (4) A relaxation of the down-payment constraint triggers a boom-bust cycle. These results are consistent with patterns observed in the US and the UK.

Keywords: Housing prices and transactions; Credit constraints; Income shocks; Financial liberalization; Overlapping generations (search for similar items in EconPapers)
JEL-codes: E32 G12 G21 R21 (search for similar items in EconPapers)
Date: 2001-10
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Citations: View citations in EconPapers (22)

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Related works:
Journal Article: Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints * (2006)
Working Paper: Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints (2001)
Working Paper: Housing Market Dynamics: on the Contribution of Income Shocks and Credit Constraints (2001)
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