Error correction dynamics of house prices : An equilibrium benchmark

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)75-95
Journal / PublicationJournal of Housing Economics
Online published14 May 2014
Publication statusPublished - Sept 2014


Central to recent debates on the "mis-pricing" in the housing market and the proactive policy of central bank is the determination of the "fundamental house price." This paper builds a dynamic stochastic general equilibrium (DSGE) model that produces reduced-form dynamics that are consistent with the error-correction models proposed by Malpezzi (1999) and Capozza et al. (2004). The dynamics of equilibrium house prices are tied to the dynamics of the house-price-to-income ratio. This paper also shows that house prices and incomes should be co-integrated, and hence provides a justification of using co-integration tests to detect possible "mis-pricing" in the housing market. © 2014 Elsevier Inc.

Research Area(s)

  • Cointegration, E30, Endogenous house price and income, Error-correction model, Fundamental house price, House price-to-income ratio, O40, R30