Research Discussion Papers, Bank of Finland
No 24/2011:
Owner-occupied housing as an investment, regional house price cycles and residential sorting
Markus Haavio ()
and Heikki Kauppi ()
Abstract: We develop a dynamic multi-region model, with fluctuating
regional house prices, where an owner-occupied household’s location choice
depends on its current wealth and its current type and involves both
consumption and investment considerations. The relative strength of the
consumption motive and the investment motive in the location choice
determines the equilibrium pattern of residential sorting, with a strong
investment (consumption) motive implying sorting according to the type
(wealth). The model predicts a negative relation between the size of house
price fluctuations and the degree of residential sorting in the type
dimension. Also, movers should be more sorted than stayers in the type
dimension. These predictions are consistent with evidence from US
metropolitan areas when income, education and age are used as proxies for
household type.
Keywords: residential sorting; house prices; consumption motive; investment motive; incomplete markets; household mobility; (follow links to similar papers)
JEL-Codes: D52; G11; R13; R21; R23; (follow links to similar papers)
88 pages, December 20, 2011
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