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The Dynamics of the House Price-to-Income Ratio: Theory and Evidence

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  • Charles Ka Yui Leung
  • Edward Chi Ho Tang

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.

Suggested Citation

  • Charles Ka Yui Leung & Edward Chi Ho Tang, 2021. "The Dynamics of the House Price-to-Income Ratio: Theory and Evidence," ISER Discussion Paper 1125, Institute of Social and Economic Research, Osaka University.
    • Handle: RePEc:dpr:wpaper:1125
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    Cited by:

    1. Gong, Yifan & Leung, Charles Ka Yui, 2024. "Does space matter? The case of the housing expenditure cap," Regional Science and Urban Economics, Elsevier, vol. 104(C).
    2. Charles Ka Yui Leung & (single author only), 2021. "Handbook of Real Estate and Macroeconomics: An Introduction," ISER Discussion Paper 1137, Institute of Social and Economic Research, Osaka University.
    3. Edward C. H. Tang, 2024. "Does Bubble Still Exist after COVID-19? Evidence from Hong Kong Housing Market," Advances in Decision Sciences, Asia University, Taiwan, vol. 28(1), pages 27-46, March.

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    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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