Housing Dynamics Over the Business Cycle

Abstract

Housing construction, measured by housing starts, leads GDP in a number of countries.Measured as residential investment, the lead is observed only in the US and Canada; elsewhere, residential investment is coincident. Variants of existing theory, however, predict housing construction lagging GDP. In all countries in the sample, nominal interest rates are low ahead of GDP peaks. Introducing fully-amortizing mortgages and an estimated process for nominal interest rates into a standard model aligns the theory with the observations on starts; one-period loans are insufficient to generate the lead. Longer time to build then makes residential investment cyclically coincident. JEL Classification Codes: E22, E32, R21, R31.

Household borrowing constraints and residential investment dynamics

“…Previous research that examined the stylized fact mentioned above has considered other mechanisms than ours with limited success. 4 Kydland, Rupert and Sustek (2016) present a model with longterm mortgage loans and multi-period time-to-build in residential construction to account for the lead of residential investment in the US versus coincident movement in eurozone countries. They model the loan structure as 'first mortgage' loans and abstract from the role of collateralized borrowing or refinancing loans against the home for consumption purposes.…”

“…Second is that, for the time period we study, relative to Kydland, Rupert and Sustek (2016), both residential investment and housing starts are in fact coincident in some European countries (for example, France and Belgium). This fact makes it difficult to justify the differences in time-to-build between US and eurozone countries.…”

“…We find that the severity of the borrowing constraint measured as the share of households facing such a constraint determines whether or not residential investment leads output. In some eurozone countries, residential investment is coincident with output (Kydland, Rupert and Sustek (2016)). Our model is consistent with this fact.…”

Real Estate and Consumption Growth as Common Risk Factors in Asset Pricing Models

“…For instance, Iacovello () reports that housing wealth accounts for almost two‐thirds of the total wealth of the median household. Iacovello () and Kydland, Rupert and Sustek () highlight the role of real estate risk in financial business cycles during the last decades. Ayuso and Restoy () argue that housing prices should be studied within the framework of a consumption‐based capital asset pricing model (CCAPM) because real estate and consumption are inescapably linked in household spending patterns.…”

Designing scalable and stock-flow-consistent agent-based models: Policy scenarios and experiments on housing markets, monetary unions and interbank networks

“…For instance, mortgage risk can move from regulated banks to unregulated shadow banking institutes (Dagher and Fu, 2011);(iv) Access to mortgage should not be too restrictive. A very strict regulation may inhibit the stimulative effect of mortgage credits on the business cycles (Kydland et al, 2012).…”