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What moves housing markets: A state-space approach of the price-income ratio

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  • Majid Haghani Rizi

Abstract

In this paper, we adopt the present-value model for the housing market to explain the relationship between expected future housing returns and expected future income growth in 21 OECD countries by using quarterly data over the period 1975–2019. By conducting the state-space approach, we use historical information of price-income ratios to predict unobserved components of the future income growth and housing returns. The evidence suggests that both expected income growth and expected housing returns are significant in explaining movements in the price-income ratio, while there is a heterogeneity among all countries. Further, we find a positive correlation between expected income growth and expected housing returns among all countries. The results of the variance decomposition of the present-value of price-income ratios also show that the most variation in the present-value components is explained in the housing return.

Suggested Citation

  • Majid Haghani Rizi, 2021. "What moves housing markets: A state-space approach of the price-income ratio," International Economics, CEPII research center, issue 167, pages 96-107.
    • Handle: RePEc:cii:cepiie:2021-q3-167-2
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    More about this item

    Keywords

    Housing returns; Income growth; Present-value model; State-space model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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