The dynamics of the house price‐to‐income ratio: Theory and evidence

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 PIR dynamics. Our predicts that very persistent and correlated to lagged aggregate output. Cross-country analysis confirms this prediction provides evidence long-term, positive, significant relationship between production. results hint at construction of early warning system housing market mispricing. formulation stochastic money growth rule may carry independent research interest.