Leverage and Price-Rent Dynamics

Speaker: Prof. Pengfei Wang (HKUST)

Topic:	Leverage and Price-Rent Dynamics
Time&Date:	12:00-13:30 pm, 2019/7/31 (Wednesday)
Venue:	Room 619, Teaching A
Speaker:	Prof. Pengfei Wang (HKUST)
Abstract:	Housing demand shocks are an important source of housing price fluctuations and, through the collateral channel, they drive macroeconomic fluctuations as well. However, these reduced-form shocks in the standard macro models fail to generate the observed large fluctuations in the housing price-to-rent ratio. We build a tractable heterogeneous-agent model that provides a microeconomic foundation for housing demand shocks. Households with high marginal utility of housing face binding credit constraints, giving rise to a liquidity premium in the aggregated housing Euler equation. The liquidity premium drives a wedge between the house price and the average rent and allows credit supply shocks to generate large fluctuations in house prices and the price-to-rent ratio.