Working Paper

Error correction dynamics of house prices: an equilibrium benchmark

Abstract: Central to recent debates on the \"mis-pricing\" in the housing market and the proactive policy of central bank is the determination of the \"fundamental house price.\" This paper builds a dynamic stochastic general equilibrium (DSGE) model that produces reduced-form dynamics that are consistent with the error-correction models proposed by Malpezzi (1999) and Capozza et al (2004). The dynamics of equilibrium house prices are tied to the dynamics of the house-price-to-income ratio. This paper also shows that house prices and incomes should be co-integrated, and hence provides a justification of using co-integration tests to detect possible \"mis-pricing\" in the housing market.

JEL Classification: E30; O40; R30;

https://doi.org/10.24149/gwp177

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2014-05-13

Number: 177

Note: Published as: Leung, Charles Ka Yui (2014), "Error Correction Dynamics of House Prices: An Equilibrium Benchmark," Journal of Housing Economics 25: 75-95.