Faculty of Economics and Business Administration Publications Database

A mechanism for booms and busts in housing prices

Hillebrand, Marten
Kikuchi, Tomoo
Volume: 51
Pages: 204 - 217
Month: February
ISSN-Print: 0165-1889
Link External Source: Online Version
Year: 2018
Keywords: Pure exchange OLG; Housing prices; Credit volume; Boom-bust cycles; Regime switching

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.