A dynamic equilibrium between house price interest payments and income
||de Vries, Paul; Boelhouwer, Peter
||A dynamic equilibrium between house price interest payments and income
||11th European Real Estate Society Conference (2-5 June 2004) Milano, Italy
||The literature on housing markets suggests that house prices in almost all western economies can be explained only by demand-oriented variables. Particular attention is devoted to the speculative or psychological effects. When prices continue to increase, consumers speculate on further rises and act swiftly. Models have been compiled of these short-run price fluctuations, or ‘shocks’, based on recent price developments. The terms ‘bubble builder’ and ‘bubble burster’ are often used in this context. However, other more permanent factors play a role in the development of house prices. Many analytical models include income, inflation and mortgage interest payments as explanatory variables for house price trends. To ensure that long-term price developments can be explained by permanent factors, these models incorporate the deviation from price equilibrium, with the permanent characteristics as the corrective variable (error-correction models). This ‘long-run equilibrium’ is usually expressed as a price-to-income ratio. This paper seeks to identify a long-run equilibrium between mortgage interest payments and household income in the Netherlands. We consider both a static equilibrium and a dynamic equilibrium. We conclude that interest payments do appear to be linked to income levels.
||House Price; Interest payments; Error-correction model
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||Comparative Urban Housing Markets
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