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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. Balázs Égert, 2007. "Real Convergence, Price Level Convergence and Inflation Differentials in Europe," Working Papers 138, Oesterreichische Nationalbank (Austrian Central Bank).
    4. 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.
    5. 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.
    6. Mr. Calvin Schnure, 2005. "Boom-Bust Cycles in Housing: The Changing Role of Financial Structure," IMF Working Papers 2005/200, International Monetary Fund.
    7. repec:onb:oenbwp:y:2007:i:1:b:1 is not listed on IDEAS
    8. 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.
    9. 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.
    10. 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.
    11. 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.
    12. 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.
    13. 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.
    14. 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.
    15. 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.
    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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    Housing; Housing - Prices;

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