A behavioral model of house prices

This paper proposes a model in which house prices are determined by economy-wide nominal income and nominal mortgage payments in the short run, while being determined by acquisition costs in the long run. The model, to a large extent, explains the 1995–2007 housing market run-up in the OECD countries by lower mortgage repayments, decreasing nominal interest rates, and increasing nominal GDP, partly induced by a large inflow of migrants. Empirical estimates give strong support for the model and suggest that it explains house prices in the OECD better than alternative models.

► Derives a behavioral model of house prices showing that house prices driven by economy-wide nominal income, nominal lending rates and mortgage repayment.
► The estimation results are consistent with the prediction of the model.
► The model explains better house prices in the OECD countries than alternative models.