“A Mechanism for Booms and Busts in Housing Prices” by Tomoo Kikuchi
National University of Singapore
Karlsruhe Institute of Technology
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. We completely characterize the perfect-foresight 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, which follow a Markov process giving rise to boombust cycles in housing prices. Price deviations from fundamentals are caused by leveraged borrowing, and turn out to be fully welfare-neutral.