Financial Constraints and House Prices - An International Perspective
September 27, 2000
Heitor Almeida
ABSTRACT
In this paper, we show substantial empirical evidence that house prices are more sensitive to shocks to per-capita
income, in countries where housing finance is more developed. This result is consistent with the theoretical framework
developed in the paper, where we study the impact of progressive relaxation of financial constraints on housing
demand and equilibrium house prices. Our results are consistent with recent literature on financial constraints
and business investment, which argues that the investment of less constrained firms can be more sensitive to changes
in cash flow. More broadly, our results challenge the traditional view that financial development leads to smaller
fluctuations in key economic variables. From a policy perspective, our paper suggests that even if financial development
is desirable for other reasons, the associated increase in the extent of fluctuations should be an explicit policy
concern.
Subject: Real Estate; Economics/Macroeconomics
Classification: Empirical
Heitor Almeida
Institution: Stern School of Business, New York University
Email: halmeida@stern.nyu.edu
Phone: (212) 998-0279
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