Housing market dynamics: on the contribution of income shocks and credit constraints

Ortalo-Magné, François and Randy, Sven (2001) Housing market dynamics: on the contribution of income shocks and credit constraints. Discussion paper, 375. Financial Markets Group, London School of Economics and Political Science, London, UK.

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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 order 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-but cycle. These results are consistent with patterns observed in the US and the UK.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://fmg.lse.ac.uk
Additional Information:	© 2001 The Authors
Library of Congress subject classification:	H Social Sciences > HG Finance H Social Sciences > HB Economic Theory
Sets:	Research centres and groups > Financial Markets Group (FMG) Collections > Economists Online Collections > LSE Financial Markets Group (FMG) Working Papers
Identification Number:	375
Date Deposited:	28 Aug 2009 11:31
URL:	http://eprints.lse.ac.uk/25049/

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