The dynamics of the house price-to-income ratio : theory and evidence

Charles Ka Yui Leung, Edward Chi Ho Tang

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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Year of publication:	March 2021 ; This version: March 2021
Authors:	Leung, Ka Yui ; Tang, Edward Chi Ho
Publisher:	Osaka, Japan : The Institute of Social and Economic Research, Osaka University
Subject:	housing affordability \| output dynamics \| endogenous house price \| wage rigidity \| monetary policy rule \| Immobilienpreis \| Real estate price \| Theorie \| Theory \| Geldpolitik \| Monetary policy \| Lohnrigidität \| Wage rigidity \| Wohnungsmarkt \| Housing market \| Schätzung \| Estimation \| Regelbindung versus Diskretion \| Rules versus discretion \| Taylor-Regel \| Taylor rule