A refinement of macroeconomy-housing price equilibrium: walking down long memory lane

Abstract

Housing prices are known to respond slowly and heterogeneously to macroeconomic variations from the demand and supply sides of housing. This offers a possibility to model the long-memory and varied persistence of housing price adjustments, through which a refined characterisation of the macroeconomic-housing price interaction in equilibrium can be developed. Our paper advances a theoretical argument, supported by empirical findings in the US, that macroeconomic variations trigger varied reactions on housing demand and supply sides. This leads to distinct trajectories of equilibrium housing price formations governed by differential price adjustments on the two sides of housing. An established longer memory on the supply side of housing demonstrates its higher persistence of disequilibrium deviations than on the demand side. In the equilibrium, certain macroeconomic factors are found to exert dual but heterogeneous roles in housing demand- and supply-side dynamics. The net role of each such factor is negative led by its even stronger negative role on the demand side compared against a smaller positive one on the supply side. Our findings contribute to deeper reflections on the likely ineffectiveness of macroeconomic interventions in housing price dynamics