Equity induced up-trading and the housing market structure: Implications for Price-to-Income (PTI) and macroprudential interventions

Abstract

This paper relates the housing market structure and the intensity of equity induced up-trading between market segments to the equilibrium ratio between house prices and household income (PTI-ratio). When fed back into the housing market through up-trading, the equity gains from home ownership that accompany appreciations might induce short-run overreactions in house prices compared to developments in household income. The aggregate equity gain available to households trading up the housing ladder, and the corresponding overreaction, is contingent on the housing market structure. The paper derives the housing market structure necessary to eliminate short run overreactions and discuss which structures that carries with them the strongest overreactions. Also, by taking the indirect effects arising from equity induced up-trading into account we relate market structure and equity to two distinct applications: (i) The short run development of the price-to-income (PTI) ratio. (ii) The price effects of macroprudential interventions.