Working Paper: NBER ID: w25667
Authors: Zheng Liu; Pengfei Wang; Tao Zha
Abstract: Aggregate housing demand shocks are an important source of house price fluctuations in the standard macroeconomic models, and through the collateral channel, they drive macroeconomic fluctuations. These reduced-form shocks, however, fail to generate a highly volatile price-to-rent ratio that comoves with the house price observed in the data (the “price-rent puzzle”). We build a tractable heterogeneous-agent model that provides a microeconomic foundation for housing demand shocks. The model predicts that a credit supply shock can generate large comovements between the house price and the price-to-rent ratio. We provide empirical evidence from cross-country and cross-MSA data to support this theoretical prediction.
Keywords: housing demand shocks; credit supply; house prices; price-rent ratio
JEL Codes: E21; E44; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit supply shocks (E51) | liquidity premium (E41) |
| credit supply shocks (E51) | composition of constrained and unconstrained agents (D10) |
| liquidity premium (E41) | house prices (R31) |
| credit supply shocks (E51) | house prices (R31) |
| credit supply shocks (E51) | price-rent ratio (R31) |
| credit supply shocks (E51) | rents (R21) |