Winners and Losers in Housing Markets

Abstract

This paper is a quantitatively oriented theoretical study into the interaction between housing prices, aggregate production, and household behavior over a lifetime. We develop a life-cycle model of a production economy in which land and capital are used to build residential and commercial real estates. We find that in an economy where the share of land in the value of real estates is large, housing prices react more to an exogenous change in expected productivity or the world interest rate, causing a large redistribution between net buyers and net sellers of houses. Changing financing constraints, however, has limited effects on housing prices.JEL codes: E20, G10, R20, R30 OVER THE LAST FEW decades, we have observed considerable fluctuations in real estate values and aggregate economic activities in many economies. In Japan, both the real capital gains on real estate during the prosperous decade of the 1980s and the losses during the depressed decades of the 1990s and 2000s are in the order of multiple years worth of GDP. Recent fluctuations in housing prices in many countries raise concerns. To what extent are these housing price fluctuations consistent with fundamental conditions? How do the fluctuations affect the wealth and welfare of different groups of households? In this paper, we develop a life-cycle model to investigate how housing prices, aggregate production, and the This paper was presented as the

Consumption and Time Use Over the Life Cycle

“…Our capital income share is nonetheless very close to the 0.25 number calculated in Kiyotaki et al. (), where similar adjustment for housing capital stock is made. Gomme and Rupert (2005) adjust labor income instead of capital and arrive at a number of 0.28.…”

“…(), assuming higher depreciation of rental properties as in Chen (), or putting a greater desire for owner occupied housing in the utility function as in Kiyotaki et al. (). Our modeling strategy is closest to this last approach.…”

The Housing Boom and Bust: Model Meets Evidence

“…First, the left-panel of Figure 7, reproduced from Foote et al (2016), demonstrates that 39 In their overlapping generations model, Kiyotaki et al (2011) find that housing price movements have negligible effects on aggregate consumption, but their calibration implies a much more pronounced hump in the home ownership profile and, as a consequence, positive and negative wealth effects offset each other more among the living generations. 40 The group of net upsizers is heavily weighted toward young, constrained households, whereas the group of net downsizers consists of both retired households (with high MPCs) and households in their prime retirement savings years (45-64) who have low MPCs.…”

The Impact of Supply Constraints on House Prices in England

“…It may also be the result of macro‐economic factors such as fluctuations in interest rates, financial liberalisation or aggregate income shocks. However, in line with life‐cycle macro‐models that assume that the supply of land is inelastic (Ortalo‐Magné and Rady, ; Kiyotaki et al ., ), the impacts of these aggregate demand factors still depend on supply constraints such as those introduced by the rigid English land‐use planning system . We also cannot rule out that the residual effects are due to adaptive expectations in conjunction with construction lags, although, as already discussed in Section , Cameron et al .…”