The Dynamics of Output Growth and Property Prices: Theory and Evidence

This paper takes a preliminary step towards understanding the dynamics of property prices and their interaction with output growth. Our general equilibrium model is able to generate closed form solutions and testable hypotheses that are broadly supported empirically. In particular, our data confirm the following hypotheses: (1) the volatility of commercial property price is higher than that of residential property price, (2) each of lagged, contemporary, and forward commercial property price is positively correlated with residential property price, (3) the contemporaneous covariance between the two property prices is larger than the lagged covariance, and (4) output growth is positively correlated with both property prices.