Wealth Effects and Price Volatility – How Vulnerable are the Households?

Abstract

High and increasing house prices generally constitute an affordability problem to many homebuyers. This paper questions the conventional view of a close link between price appreciation and affordability problem by arguing that many homebuyers in the market are also home sellers. as different submarkets in the owner-occupied sector tend to move in the same pace – price wise, a substantial part of the homebuyers are less sensitive to price movements as the price increase for a new home is paralleled by an increase in equity from the old house. This phenomenon may then even contribute to a further price increase, as these households are less likely to be constrained by a stringent LTV. From this hypothesis follows that house price inflation, not fully supported by fundamentals, is characterised by an increasing share of existing homeowners among the house-buyers. Econometric work, applied to the Swedish house market for single family houses, indicates an increasing share of existing homeowners among recent buyers at the latter years of the Swedish house price boom. This is basically measured by increasing real disposable income over time.