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The Dynamics of the House Price-to-Income Ratio: Theory and Evidence

Charles Leung () and Edward Chi Ho Tang

No GRU_2021_005, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

Abstract: The house price-to-income ratio (PIR) is widely used as an affordability indicator. This paper complements the cross-sectionally focused literature by proposing a tractable model for the PIR dynamics. Our model predicts that the PIR is very persistent and is correlated to the lagged aggregate output. Cross-country analysis confirms this prediction and provides evidence for a long-term, positive and significant relationship between PIR and aggregate production. Our results hint at the construction of an early warning system for housing market mispricing. Our tractable formulation of a stochastic money growth rule may carry independent research interest

Keywords: housing affordability; output dynamics; endogenous house price; wage rigidity; monetary policy rule (search for similar items in EconPapers)
JEL-codes: E30 O40 R30 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2021-03-07
New Economics Papers: this item is included in nep-mac and nep-ure
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