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

Charles Leung and Edward Chi Ho Tang

ISER Discussion Paper from Institute of Social and Economic Research, Osaka University

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.

Date: 2021-03
New Economics Papers: this item is included in nep-cwa
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Related works:
Journal Article: The dynamics of the house price‐to‐income ratio: Theory and evidence (2023)
Working Paper: The Dynamics of the House Price-to-Income Ratio: Theory and Evidence (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:dpr:wpaper:1125

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