Working Papers

2019-09 | March 2019


A Theory of Housing Demand Shocks


Aggregate housing demand shocks are an important source of house price fluctuations in the standard macroeconomic models, and through the collateral channel, they drive macroeconomic fluctuations. These reduced-form shocks, however, fail to generate a highly volatile price-to-rent ratio that comoves with the house price observed in the data (the “price-rent puzzle”). We build a tractable heterogeneous-agent model that provides a microeconomic foundation for housing demand shocks. The model predicts that a credit supply shock can generate large comovements between the house price and the price-to-rent ratio. We provide empirical evidence from cross-country and cross-MSA data to support this theoretical prediction.

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Article Citation

Liu, Zheng, Pengfei Wang, and Tao Zha. 2019. "A Theory of Housing Demand Shocks," Federal Reserve Bank of San Francisco Working Paper 2019-09. Available at