Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/123772
Authors: 
Xu, Shaofeng
Year of Publication: 
2015
Series/Report no.: 
Bank of Canada Working Paper 2015-26
Abstract: 
This paper examines the welfare cost of rare housing disasters characterized by large drops in house prices. I construct an overlapping generations general equilibrium model with recursive preferences and housing disaster shocks. The likelihood and magnitude of housing disasters are inferred from historic housing market experiences in the OECD. The model shows that despite the rarity of housing disasters, Canadian households would willingly give up 5 percent of their non-housing consumption each year to eliminate the housing disaster risk. The evaluation of this risk, however, varies considerably across age groups, with a welfare cost as high as 10 percent of annual non-housing consumption for the old, but near zero for the young. This asymmetry stems from the fact that, compared to the old, younger households suffer less from house price declines in disaster periods, due to smaller holdings of housing assets, and benefit from lower house prices in normal periods, due to the negative price effect of disaster risk.
Subjects: 
Housing
Asset pricing
Economic models
JEL: 
E21
E44
G11
R21
Document Type: 
Working Paper

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