Abstract: The proposition that "housing prices can't continue to outpace
growth in household income" (Wall Street Journal; July 25, 2002) is
the received wisdom among many housing-market observers. More
formally, many in the housing literature argue that house prices and
income are cointegrated. In this paper, I show that the data do not
support this view. Standard tests using 27 years of national-level
data do not find evidence of cointegration. However, it is known
that tests for cointegration have low power, especially in small
samples. I use panel-data tests for cointegration that have been
shown to be more powerful than their standard time-series
counterparts to test for cointegration in a panel of 95 metro areas
over 23 years. Using a bootstrap approach to allow for
cross-correlations in city-level house-price shocks, I show that
even these more powerful tests do not reject the hypothesis of no
cointegration. Thus the error-correction specification for house
prices and income commonly found in the literature may be
inappropriate.
Keywords: House Prices, cointegration, panel data
Full paper (297 KB PDF)
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Last update: May 13, 2003
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