Housing Market Dynamics

Sven Rady and Francois Ortalo-Magne

Discussion Papers in Economics from University of Munich, Department of Economics

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 Demand; Income Fluctuations; Overlapping Generations; Collateral Constraint (search for similar items in EconPapers)
JEL-codes: E32 G12 G21 R21 (search for similar items in EconPapers)
Date: 2001-04
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Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenec:20

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