The Long-Run Relationship between House Prices and Income: Evidence from Local Housing Markets

By Joshua Gallin. 2003

438 citations recorded by the source corpus.

The proposition that "housing prices can't continue to outpace growth in household income" (Wall Street Journal; July 25, 2002) is the received wisdom among many housing-market observers. More formally, many in the housing literature argue that house prices and income are cointegrated. In this paper, I show that the data do not support this view. Standard tests using 27 years of national-level data do not find evidence of cointegration. However, it is known that tests for cointegration have low power, especially in small samples. I use panel-data tests for cointegration that have been shown to be more powerful than their standard time-series counterparts to test for cointegration in a panel of 95 metro areas over 23 years. Using a bootstrap approach to allow for cross-correlations in city-level house-price shocks, I show that even these more powerful tests do not reject the hypothesis of no cointegration. Thus the error-correction specification for house prices and income commonly found in the literature may be inappropriate.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/b93c4dc0ee6196589d929cf3aeb8943109e2ae1f

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Citations in the corpus

Recent House Price Developments (2006, background): “See for example Gallin (2003) and Gurkaynak (2005) stressing several drawbacks from using an econometric approach for such purposes.”
Household Expenditures, Wages, Rents (2011, background): “Equations (11) and (12) can be combined to show that at the aggregate level, the model produces”
Estimation and inference for spatial models with heterogeneous coefficients: An application to US house prices (2020, positive): “Determinants of U.S. house price changes are numerous and well-documented in the literature; two prominent fundamentals being real per capita disposable income and population - see for example Malpezzi (1999) and Gallin (2006) among others.”
Housing Bubbles: A Survey (2011, positive): “For example, Gallin (2006) shows that prices and rents are cointegrated but also that the pricerent ratio predicts future changes in both prices and rents over a four-year horizon.”
Identifying the determinants of housing prices in China using spatial regression and the geographical detector technique (2017, background): “From the perspective of housing demand, wage level is representative of income, which is recognized to have a positive relation with housing prices (Gallin, 2006).”
Do House Prices Reflect Fundamentals? Aggregate and Panel Data Evidence (2009, positive): “Finally, Gallin (2006) and Mikhed and Zemč́ık (2007) employed panel data for the U.S. MSA to analyze house prices.”
Is there a Bubble in the Chinese Housing Market? (2010, methodology): “For example, Capozza et al., (2002) and Gallin (2006) have advocated models to derive the stationarity of the price income ratio.”
Testing for Bubbles in Housing Markets: A Panel Data Approach (2009, methodology): “1Fundamentals (including income) can also be motivated by considering omitted variables in the present value formula as in Hamilton (1986) or via a general supply-demand model as in Gallin (2006).”