The Dynamics of Housing Prices : an International Perspective

THE DYNAMICS OF HOUSING PRICES: AN INTERNATIONAL PERSPECTIVE∗ by Peter Englund Yannis M. Ioannides Department of Economics Department of Economics University of Uppsala VPI&SU S–751 20 Uppsala Sweden Blacksburg, VA 24061-0316 Telephone: 46-18-181105 Telephone: 1-703-231-7981 Email: Email: yannis@vtvm1 This paper provides an international perspective on the dynamics of housing prices in alternative short-run and long-run settings. It proposes an overlappinggenerations model of an open economy, where foreign investment is allowed in all assets, that is physical capital, land, and housing. Long-run dynamics are characterized by the usual saddle point property of competitive equilibrium, with the openness of the economy augmenting the number of unstable branches. The paper investigates the possibility of bubbles in housing and land markets, and shows that whereas a bubble on the asset price of land is possible, this is not the case with the asset price of housing. The paper examines the potential consequences of international differences in patterns of residential mobility by studying the short-run dynamics of closed economies where adjustment of housing consumption is subject to transactions costs. Numerical simulations indicate that countries with low residential mobility rates should exhibit higher price volatility.