Working Paper: CEPR ID: DP3015
Authors: Francois Ortalo-Magné; Sven Rady
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: credit constraints; financial liberalization; housing prices; transactions; income shocks; overlapping generations
JEL Codes: E32; G12; G21; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Current income of young credit-constrained households (G51) | Housing prices (R31) |
| Housing prices (R31) | Number of housing transactions (R31) |
| Income shocks (D31) | Housing prices (R31) |
| Relaxation of downpayment constraint (G59) | Boombust cycle (E32) |
| Housing prices (R31) | Overreaction to income shocks (H31) |