Christian Heebøll-Christensen: Housing Markets in Booms and Busts. Essays on housing market structures and the policy response to boom-bust cycles

This PhD dissertation seeks to understand the large swings in housing prices, which have been a crucial factor in the buildup and impact of the global financial crisis. The thesis is comprised of four chapters.

Chapter one analyzes the recent boom-bust cycle in the US housing market from a regional perspective. Allowing for regional specific supply restrictions we estimate a simultaneous equation system for housing prices, housing supply and subprime lending in 247 urban areas. Our results indicate that more supply restricted areas are more exposed to financial accelerator effects, which explains the greater housing price volatility in these areas.

Chapter two seeks to understand regional housing price dynamics by estimating regional-specific cointegrated VAR models for 100 US urban areas. Here our results demonstrate substantial differences in the market structures depending on different market characteristics. Specifically, the importance of subprime expansion as well as adaptive price expectation has been greater in supply restricted areas, in more populous areas and to some extend in states classified as non-recourse for residential mortgages.

Chapter three is concerned with regional Danish housing price dynamics. Using panel restricted standard and global VAR models, we analyze the structures of 14 Danish housing markets. These models are then applied to investigate the factors behind the diverse regional Danish housing price booms of the 2000s. We find clear indications of price ripple effects between markets, as well as heterogeneous market structures related to individual area characteristics. Using counterfactual simulations, we find that financial deregulation and monetary policy were decisive in the pre-crisis housing price boom, especially in urban areas. In other areas, prices are relatively more sensitive to income and unemployment rate changes and, hence, fiscal policy had a somewhat larger influence in these areas. The Danish property tax freeze from 2002 and onwards is found to be price destabilizing, but generally it had a minor influence.

The last chapter compares the financial destabilizing effects of excess liquidity versus credit growth, applying a cointegrated VAR model based on national US data. Consistent with monetarist theory, the results suggest a stable money supply-demand relation in the period in question. However, the related excess liquidity only affects housing prices after year 2000. Meanwhile, persistent cycles of real housing prices and leverage appear to have been driven by real credit shocks, in accordance with post-Keynesian theories on financial instability. Importantly, however, the two types of mechanisms are found to be time varying and closely related, which could explain the various results found in earlier related litterateur.