Equity induced up-trading and the housing market structure

Abstract

Equity induced up-trading and the housing market structure: Implications for price-toincome (PTI) and macroprudential interventions Trond-Arne Borgersen Article information:To cite this document: Trond-Arne Borgersen , (2014),"Equity induced up-trading and the housing market structure", International Abstract Purpose -The purpose of this paper is to highlight the importance of home equity and the interplay between market segments for housing market developments. The intention is to show that it is not only the aggregate equity gain but also the distribution of equity gains between segments that matter for how shocks to income impact house prices. Design/methodology/approach -The paper sets out a linear housing market model with three segments. Households trade up a housing ladder and link the three segments for owner-occupied housing. The up-trading is equity-induced. An expression for the house price index, which is related to the market segment prices both directly through the segment size and indirectly through a segment position on the housing ladder is derived. The author considers the price effects of shocks to income in four housing market regimes. Findings -The heterogeneous housing market model shows how the interplay between segments impacts housing markets. When considering shocks to income, short-run deviations in the price-to-income (PTI) ratio compared to their long-run equilibrium due to equity-induced up-trading were found. The extent of PTI overshooting is related to the intensity of equity-induced up-trading between different segments. The market structure necessary to eliminate such overshooting is contingent on the distribution of equity gains between segments. Finally, the paper shows how the price effects of macroprudential interventions might be non-negligible when indirect effects are taken into account. Originality/value -The linear housing market model with three market segments introduces a framework where the intensity of equity-induced up-trading in different market segments can be analyzed. This distributional aspect is, to the best of the author's knowledge, novel. The context-specific relation between housing market structure, equity-induced up-trading and short-run deviations in the PTI ratio provides a foundation for future research.

Social Housing Policy in a Segmented Housing Market: Indirect Effects on Markets and on Individuals

“…Rothenberg et al (1991) states "Housing market events and government policy initiatives which impact one submarket will have their primary effects in that submarket, with secondary effects appearing in other submarkets to the extent those submarkets are linked in substitution possibilities with the original submarket" (Rothenberg, 1991, p. 48) Substitution effects might be important between some segments, while equity effects might be important between segments (See Lee and Ung (2005) or Røed-Larsen (2010b) for the role of equity). Our frame of reasoning draws on Borgersen (2016Borgersen ( , 2014aBorgersen ( , 2014b. We consider a housing market that contains two segments for owner-occupied housing, starter and family homes, and is characterised by a housing ladder where a starter home is the first-step on the ladder.…”