The dynamics of the house price-to-income ratio: Theory and evidence |
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Authors: | Charles Ka Yui Leung Edward Chi Ho Tang |
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Institution: | 1. Department of Economics and Finance, City University of Hong Kong, Kowloon Tong, Hong Kong;2. Department of Economics and Finance, Hong Kong Shue Yan University, North Point, Hong Kong |
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Abstract: | The house price-to-income ratio (PIR) is widely used as an affordability indicator. This paper complements the cross-sectionally focused literature by proposing a tractable model for the PIR dynamics. Our model predicts that the PIR is very persistent and is correlated to the lagged aggregate output. Cross-country analysis confirms this prediction and provides evidence for a long-term, positive, and significant relationship between PIR and aggregate production. Our results hint at the construction of an early warning system for housing market mispricing. Our tractable formulation of a stochastic money growth rule may carry independent research interest. |
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Keywords: | endogenous house price housing affordability monetary policy rule output dynamics wage rigidity |
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