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The dynamics of the house price-to-income ratio: Theory and evidence
Author(s)
Date Issued
2023
Journal
ISSN
1465-7287
10743529
Citation
Contemporary Economic Policy, Jan. 2023, Vol. 41(1), pp. 61-78.
Type
Peer Reviewed Journal Article
Abstract
The house price-to-income ratio (PIR) is widely used as an affordability indicator. This paper complements the cross-sectionally focused literature by proposing a tractable model for the PIR dynamics. Our model predicts that the PIR is very persistent and is correlated to the lagged aggregate output. Cross-country analysis confirms this prediction and provides evidence for a long-term, positive, and significant relationship between PIR and aggregate production. Our results hint at the construction of an early warning system for housing market mispricing. Our tractable formulation of a stochastic money growth rule may carry independent research interest.
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