TY - JOUR
T1 - The dynamics of the house price‐to‐income ratio
T2 - Theory and evidence
AU - Leung, Charles Ka Yui
AU - Tang, Edward Chi Ho
PY - 2023/1
Y1 - 2023/1
N2 - 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.
AB - 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.
KW - endogenous house price
KW - housing affordability
KW - monetary policy rule
KW - output dynamics
KW - wage rigidity
UR - http://www.scopus.com/inward/record.url?scp=85107952930&partnerID=8YFLogxK
UR - https://www.scopus.com/record/pubmetrics.uri?eid=2-s2.0-85107952930&origin=recordpage
U2 - 10.1111/coep.12538
DO - 10.1111/coep.12538
M3 - RGC 21 - Publication in refereed journal
SN - 1074-3529
VL - 41
SP - 61
EP - 78
JO - Contemporary Economic Policy
JF - Contemporary Economic Policy
IS - 1
ER -
