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The long-run relationship between house prices and income: evidence from local housing markets

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Abstract

The proposition that \"housing prices can't continue to outpace growth in household income\" (Wall Street Journal; July 25, 2002) is the received wisdom among many housing-market observers. More formally, many in the housing literature argue that house prices and income are cointegrated. In this paper, I show that the data do not support this view. Standard tests using 27 years of national-level data do not find evidence of cointegration. However, it is known that tests for cointegration have low power, especially in small samples. I use panel-data tests for cointegration that have been shown to be more powerful than their standard time-series counterparts to test for cointegration in a panel of 95 metro areas over 23 years. Using a bootstrap approach to allow for cross-correlations in city-level house-price shocks, I show that even these more powerful tests do not reject the hypothesis of no cointegration. Thus the error-correction specification for house prices and income commonly found in the literature may be inappropriate.

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  • Joshua H. Gallin, 2003. "The long-run relationship between house prices and income: evidence from local housing markets," Finance and Economics Discussion Series 2003-17, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2003-17
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    Cited by:

    1. Markus K. Brunnermeier & Christian Julliard, 2008. "Money Illusion and Housing Frenzies," The Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 135-180, January.
    2. Sergio Clavijo & Michel Janna & Santiago Munoz, 2005. "The Housing Market in Colombia: Socioeconomic and Financial Determinants," Research Department Publications 4389, Inter-American Development Bank, Research Department.
    3. Holly, Sean & Pesaran, M. Hashem & Yamagata, Takashi, 2010. "A spatio-temporal model of house prices in the USA," Journal of Econometrics, Elsevier, vol. 158(1), pages 160-173, September.
    4. Michael Beenstock & Daniel Felsenstein, 2010. "Spatial error correction and cointegration in nonstationary panel data: regional house prices in Israel," Journal of Geographical Systems, Springer, vol. 12(2), pages 189-206, June.
    5. Mr. Calvin Schnure, 2005. "Boom-Bust Cycles in Housing: The Changing Role of Financial Structure," IMF Working Papers 2005/200, International Monetary Fund.
    6. Sergio Clavijo & Michel Janna & Santiago Muñoz, 2004. "LA VIVIENDA EN COLOMBIA: Sus Determinantes Socio-Económicos y Financieros," Borradores de Economia 3099, Banco de la Republica.
    7. Razak, Nursakina & Masih, Mansur, 2018. "Does income or house price lead in the public housing market? a case study of Singapore’s public housing sector," MPRA Paper 94212, University Library of Munich, Germany.
    8. Balázs Egert, 2007. "Real Convergence, Price Level Convergence and Inflation Differentials in Europe," CESifo Working Paper Series 2127, CESifo.
    9. Clavijo, Sergio & Janna, Michel & Muñoz, Santiago, 2005. "The Housing Market in Colombia: Socioeconomic and Financial Determinants," IDB Publications (Working Papers) 1548, Inter-American Development Bank.
    10. Sergio Clavijo & Michel Janna & Santiago Munoz, 2005. "El mercado colombiano de la vivienda: factores socioeconómicos y financieros determinantes," Research Department Publications 4390, Inter-American Development Bank, Research Department.
    11. Davis, Morris A. & Heathcote, Jonathan, 2007. "The price and quantity of residential land in the United States," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2595-2620, November.
    12. Frederic S. Mishkin, 2007. "Housing and the monetary transmission mechanism," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 359-413.
    13. Philip Arestis & Ana Rosa Gonzalez‐Martinez, 2019. "Economic precariousness: A new channel in the housing market cycle," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(2), pages 1030-1043, April.
    14. repec:onb:oenbwp:y:2007:i:1:b:1 is not listed on IDEAS
    15. Cabray L. Haines & Richard J. Rosen, 2007. "Bubble, bubble, toil, and trouble," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 31(Q I), pages 16-35.
    16. Sei-Wan Kim & Radha Bhattacharya, 2009. "Regional Housing Prices in the USA: An Empirical Investigation of Nonlinearity," The Journal of Real Estate Finance and Economics, Springer, vol. 38(4), pages 443-460, May.
    17. repec:onb:oenbwp:y::i:138:b:1 is not listed on IDEAS
    18. Ch. Warisse, 2017. "Analysis of the developments in residential property prices : Is the Belgian market overvalued ?," Economic Review, National Bank of Belgium, issue i, pages 61-77, June.

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