Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/104168
Authors: 
Ortalo-Magné, François
Rady, Sven
Year of Publication: 
2005
Series/Report no.: 
Munich Discussion Paper 2005-1
Abstract: 
We propose a life-cycle model of the housing market with a property ladder and a credit constraint. We focus on equilibria which replicate the facts that credit constraints delay some households' first home purchase and force other households to buy a home smaller than they would like. The model helps us identify a powerful driver of the housing market: the ability of young households to afford the down payment on a starter home, and in particular their income. The model also highlights a channel whereby changes in income may yield housing price overshooting, with prices of trade-up homes displaying the most volatility, and a positive correlation between housing prices and transactions. This channel relies on the capital gains or losses on starter homes incurred by credit-constrained owners. We provide empirical support for our arguments with evidence from both the U.K. and the U.S.
Subjects: 
Housing Demand
Income Fluctuations
Overlapping Generations
Collateral Constraint
JEL: 
E32
G12
G21
R21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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