• Universiteit van Amsterdam

• Wetenschappelijk

• Bouwen & Wonen,
• Economie & Bedrijven

Preference for Housing Services and Rational House Price Bubbles

Working Paper

There is a strong negative cross-country correlation between the share of consumption that households spend on housing services and house price bubbles. Countries that spend less on housing services as a share of total consumption, experienced significantly more house price booms and busts during the period 1970-2014, and the associated housing boom-bust cycles were larger and more volatile.

This paper proposes an overlapping generation (OLG) model that replicates these facts by separating the consumption and investment side of a real estate asset. Two main results emerge from the analysis of the model.
First, when agents have weaker preferences for housing services (and hence htis model economy will be characterized by lower consumption shares for housing services), the economy is more prone to experience house price bubbles.

Second, and conditional on house price bubble existence, the economy will face larger house price bubbles. The model offers novel policy implications. While help-to-buy schemes make the economy more bubble-prone, rental subsidies are an effective tool to reduce the prevalence of house price bubbles.

Media