A mechanism for booms and busts in housing prices

Marten Hillebrand; Tomoo Kikuchi

doi:10.1016/j.jedc.2014.09.033

A mechanism for booms and busts in housing prices

Marten Hillebrand^*, Tomoo Kikuchi

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

9 Citations (Scopus)

Abstract

The paper studies the dynamics of housing prices in a pure exchange overlapping generations framework a la Samuelson (1958) and Gale (1973), which is extended to include housing as a utility-yielding durable good and a credit sector. We completely characterize the equilibrium dynamics, which alternates between an expansive regime where leveraged borrowing increases housing prices, and a contractive regime where these variables decrease. Regime switches occur due to small but persistent income changes giving rise to boom-bust cycles in housing prices. Price deviations from fundamentals are caused by leveraged borrowing, and turn out to be fully welfare-neutral.

Original language	English
Pages (from-to)	204-217
Number of pages	14
Journal	Journal of Economic Dynamics and Control
Volume	51
DOIs	https://doi.org/10.1016/j.jedc.2014.09.033
Publication status	Published - 2015 Feb 1
Externally published	Yes

Keywords

Boom-bust cycles
Credit volume
Housing prices
Pure exchange OLG
Regime switching

ASJC Scopus subject areas

Economics and Econometrics
Control and Optimization
Applied Mathematics

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10.1016/j.jedc.2014.09.033

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abstract = "The paper studies the dynamics of housing prices in a pure exchange overlapping generations framework a la Samuelson (1958) and Gale (1973), which is extended to include housing as a utility-yielding durable good and a credit sector. We completely characterize the equilibrium dynamics, which alternates between an expansive regime where leveraged borrowing increases housing prices, and a contractive regime where these variables decrease. Regime switches occur due to small but persistent income changes giving rise to boom-bust cycles in housing prices. Price deviations from fundamentals are caused by leveraged borrowing, and turn out to be fully welfare-neutral.",

keywords = "Boom-bust cycles, Credit volume, Housing prices, Pure exchange OLG, Regime switching",

author = "Marten Hillebrand and Tomoo Kikuchi",

note = "Funding Information: We would like to thank Costas Azariadis, Volker B{\"o}hm, John Drifill, Florian Englmaier, Aditya Goenka, Nicolas Jacquet, Basant Kapur, John Stachurski, Hoon Hian Teck, Yong Wang, Haiping Zhang, Shenghao Zhu and seminar participants at the Australian National University, Nanyang Technological University, National University of Singapore, Singapore Management University, University of Adelaide, University of Hong Kong, the AEI-Four Joint Workshop in Singapore, the CEF 2012 Conference in Prague, and the Annual Meeting of the Verein f{\"u}r Socialpolitik in G{\"o}ttingen for their helpful comments, and Yan Naung Oak for computational assistance. We acknowledge financial support of Singapore Ministry of Education Academic Research Fund Tier 1 R-122-000-140-112 . Publisher Copyright: {\textcopyright} 2014 Elsevier B.V.",

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doi = "10.1016/j.jedc.2014.09.033",

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AU - Hillebrand, Marten

AU - Kikuchi, Tomoo

N1 - Funding Information: We would like to thank Costas Azariadis, Volker Böhm, John Drifill, Florian Englmaier, Aditya Goenka, Nicolas Jacquet, Basant Kapur, John Stachurski, Hoon Hian Teck, Yong Wang, Haiping Zhang, Shenghao Zhu and seminar participants at the Australian National University, Nanyang Technological University, National University of Singapore, Singapore Management University, University of Adelaide, University of Hong Kong, the AEI-Four Joint Workshop in Singapore, the CEF 2012 Conference in Prague, and the Annual Meeting of the Verein für Socialpolitik in Göttingen for their helpful comments, and Yan Naung Oak for computational assistance. We acknowledge financial support of Singapore Ministry of Education Academic Research Fund Tier 1 R-122-000-140-112 . Publisher Copyright: © 2014 Elsevier B.V.

PY - 2015/2/1

Y1 - 2015/2/1

N2 - The paper studies the dynamics of housing prices in a pure exchange overlapping generations framework a la Samuelson (1958) and Gale (1973), which is extended to include housing as a utility-yielding durable good and a credit sector. We completely characterize the equilibrium dynamics, which alternates between an expansive regime where leveraged borrowing increases housing prices, and a contractive regime where these variables decrease. Regime switches occur due to small but persistent income changes giving rise to boom-bust cycles in housing prices. Price deviations from fundamentals are caused by leveraged borrowing, and turn out to be fully welfare-neutral.

AB - The paper studies the dynamics of housing prices in a pure exchange overlapping generations framework a la Samuelson (1958) and Gale (1973), which is extended to include housing as a utility-yielding durable good and a credit sector. We completely characterize the equilibrium dynamics, which alternates between an expansive regime where leveraged borrowing increases housing prices, and a contractive regime where these variables decrease. Regime switches occur due to small but persistent income changes giving rise to boom-bust cycles in housing prices. Price deviations from fundamentals are caused by leveraged borrowing, and turn out to be fully welfare-neutral.

KW - Boom-bust cycles

KW - Credit volume

KW - Housing prices

KW - Pure exchange OLG

KW - Regime switching

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JO - Journal of Economic Dynamics and Control

JF - Journal of Economic Dynamics and Control

ER -

A mechanism for booms and busts in housing prices

Abstract

Keywords

ASJC Scopus subject areas

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