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
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.
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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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