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A New Perspective on the Relationship Between House Prices and Income

Author

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  • Quan Gan

    (School of Economics, University of New South Wales)

  • Robert J. Hill

    (School of Economics, University of New South Wales)

Abstract

We show that a strong linear relationship exists between income and house price quantiles in Sydney (Australia), Houston, and the state of Texas. This suggests that the house price distribution is closely approximated by the income distribution after a location-scale transformation. The slope of the line changes over time in response to changes in the mortgage market. We argue that this finding is consistent with a simple variant on the permanent income hypothesis. We then explore some of the implications with regard to the evolution of house prices, price-to-income ratios, the efficiency of the housing market, the construction and interpretation of hedonic price indexes for housing, and for public policy.

Suggested Citation

  • Quan Gan & Robert J. Hill, 2008. "A New Perspective on the Relationship Between House Prices and Income," Discussion Papers 2008-13, School of Economics, The University of New South Wales.
    • Handle: RePEc:swe:wpaper:2008-13
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    File URL: http://wwwdocs.fce.unsw.edu.au/economics/Research/WorkingPapers/2008_13.pdf
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    References listed on IDEAS

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    Cited by:

    1. Hans R.A. Koster & Jan Rouwendal, 2012. "The Impact Of Mixed Land Use On Residential Property Values," Journal of Regional Science, Wiley Blackwell, vol. 52(5), pages 733-761, December.

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    More about this item

    Keywords

    Real Estate; Permanent income; Mortgage market; Housing bubble; Hedonic index;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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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