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Housing Market Fluctuations in a Life-Cycle Economy with Credit Constraints

Sven Rady
Authors registered in the RePEc Author Service: Francois Ortalo-Magne

FMG Discussion Papers from Financial Markets Group

Abstract: This paper presents a first step towards a new theory of housing market fluctuations. We develop a life-cycle model where agents face credit constraints and their housing consumption is restricted to a discrete set of possibilities. The market interaction of young credit constrained agents climbing the property ladder with old agents trading down, generates co-movements of aggregate house prices, volume of transactions and income, consistent with the patterns observed in the U.S and the UK Under plausible assumptions the model reproduces the slight lead of transaction volume over the other two series as documented in the data. Our theory asserts that the fluctuations in housing prices depend crucially on fluctuation in the current income of young household the first-time buyers). Thus, it sheds light on why housing prices are more volatile than GDP, and why they exhibit some degree of predictability in a market where households optimise over the timing of their transaction.

Date: 1998-06
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Citations: View citations in EconPapers (30)

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Related works:
Working Paper: Housing market fluctuations in a life-cycle economy with credit constraints (1998) Downloads
Working Paper: Housing Market Fluctuations in a Life-Cycle Economy with Credit Constraints (1998) Downloads
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