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27/07/2022

Housing Investment: What Makes It so Volatile? Theory and Evidence from OECD Countries

This paper explains how mortgage market liberalization can introduce greater
volatility in the housing market, which is a stylized fact documented from OECD
countries, with a DSGE model where households face a credit constraint and housing
is used as collateral. The housing collateral constraint creates a link between the
housing market and borrowing capacity, a link that amplifies the response of housing
demand to technology shocks and strengthens in economies with more liberalized
mortgage markets. The calibrated model is able to explain about 90 percent of
housing investment volatility in the UK.