A mechanism for booms and busts in housing prices |
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Institution: | 1. The Australian National University, Australia;2. Griffith University, Australia |
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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. |
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Keywords: | Pure exchange OLG Housing prices Credit volume Boom-bust cycles Regime switching |
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