“What does the house price-to-income ratio tell us about the housing market affordability: A theory and international evidence” by Dr. Charles Ka Yui LEUNG
Dr. Charles Ka Yui LEUNG
Department of Economics and Finance
City University of Hong Kong
While the house price-to-income ratio (PIR) is widely used as an indicator for affordability even housing market mispricing, formal analysis is relatively rare. This paper proposes a simple dynamic, stochastic general equilibrium (DSGE) model and shows that the movement of PIR is positively correlated to the aggregate output level in previous periods. The model also predicts that the variance of PIR is positively correlated with the variance of output. These implications are tested and verified with international data. Our tractable formulation of a stochastic money growth rule may be of independent interest. Directions of future research are also discussed.