What moves housing markets: A state-space approach of the price-income ratio

Abstract

In this paper, we adopt the present-value model for the housing market to explain the relationship between expected future housing returns and expected future income growth in 21 OECD countries by using quarterly data over the period 1975–2019. By conducting the state-space approach, we use historical information of price-income ratios to predict unobserved components of the future income growth and housing returns. The evidence suggests that both expected income growth and expected housing returns are significant in explaining movements in the price-income ratio, while there is a heterogeneity among all countries. Further, we find a positive correlation between expected income growth and expected housing returns among all countries. The results of the variance decomposition of the present-value of price-income ratios also show that the most variation in the present-value components is explained in the housing return.