The dynamics of the house price‐to‐income ratio : Theory and evidence

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Journal / PublicationContemporary Economic Policy
Online published16 Jun 2021
Publication statusOnline published - 16 Jun 2021

Abstract

The house price-to-income ratio (PIR) is widely used as an affordability indicator. This paper complements the cross-sectionally focused literature by proposing a tractable model for the PIR dynamics. Our model predicts that the PIR is very persistent and is correlated to the lagged aggregate output. Cross-country analysis confirms this prediction and provides evidence for a long-term, positive, and significant relationship between PIR and aggregate production. Our results hint at the construction of an early warning system for housing market mispricing. Our tractable formulation of a stochastic money growth rule may carry independent research interest.

Research Area(s)

  • endogenous house price, housing affordability, monetary policy rule, output dynamics, wage rigidity