Abstract
Movements in aggregate and regional house prices are largely accounted for by movements in the rent-price ratio rather than movements in rents. Movements in rent-price ratios are correlated with trend deviations in household income and the rate of home ownership, both of which are at odds with efficient markets predictions of equilibrium rent-price ratios. To reconcile these facts, I model the rent-price ratio as determined by the marginal homebuying household, when this household is borrowing constrained. Factors which loosen or tighten the borrowing constraints of this marginal household are first order determinants of house prices.
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