title: Essays on housing and buy to let markets
Creators: name: Velivela, Deva Ruthvik
Publisher: name: University of Glasgow
Year: 2022

description: This thesis provides an in-depth discussion of housing markets and their effects on the volatility of aggregate economy. This thesis consists of three major theoretical models and one empirical model. Chapter one gives an introduction to the housing markets and what the literature suggests about their effects on the wealth of households, as well as the contribution and structure of the thesis are discussed. Chapter two examines the role of collateral constraints in a baseline model with no Buy to Let (BTL) sector in the economy. Using a core framework of Dynamic Stochastic General Equilibrium (DSGE) models, I found that when houses act as collateral, change in house prices have a substantial effect on the consumption of agents who are collaterally constrained. In particular, Borrowers are better off when the house prices are subjected to an increase, compared to that of agents who are not collaterally constrained. Furthermore, when amount of lending is based on income, I found that labour dynamics play a huge role and Borrowers are subjected to a substitution effect with a positive technology shock in housing market and this leads to an increase in labour and net income of Borrowers and in turn an increase in the their housing is observed. In light of the Bank of England paper by Baptista et al. (2016) and then consultation by the Financial Policy Committee (FPC) on the risks of BTL markets on the economy, chapter three examines the role of BTL markets on the volatility of house prices using a DSGE framework with Dixit Stiglitz Lite Utility. As the policy is expected to operate at business cycle frequency, I built a DSGE model rather than an OLG model. The results from the model indicate that by altering the size of BTL markets using downpayment ratio as a macro prudential policy has a very little effect on the volatility of house prices as opposed to the agent based model Baptista et al(2016). Such results indicate that there is a chance for some serious supply constraints in the economy especially in the urban areas. However, changes in size of BTL markets do have a substantial effect on the volatility of an aggregate economy. This leads us to chapter four, which investigates the effects of a rich set of shocks including news shocks on my model economy with agents subjected to CES utility. I use this framework to analyze which policy out of the Macro prudential of Downpayment ratio and Monetary policy is better to curb the volatility of the aggregate economy. The results indicate that labour markets play a pivotal role in most of the dynamics and the volatility stemmed from the Monetary policy shock is substantially high on housing market compared to that of the consumption goods market. I also found that Monetary policy is the only effective policy which affects the Hand to Mouth agents optimal choices. However, Macro prudential policy is more effective in both the Borrowers and Savers volatilities of choice variables. With a News shock in Monetary policy, I tend to observe that the economy volatility is only affected by the Monetary policy with no affect from Macro Prudential policy. Finally in chapter five, I take my baseline models augmented with habit formation: one without housing and the other one with housing, to data. Using the 1980 to 2020 quarterly data of U.S and employing the Bayesian Estimation techniques, I have estimated some key parameters and compared the estimated parameters between the two baseline models. Results show that most of the estimates are in line with the literature. Inclusion of housing has substantially increased the effect of the monetary policy and it’s persistence in the economy. Due to the inclusion of collateral constraint, agents are subjected a better wealth effects and this leads to them reacting less to the change in wages. Habits have slightly increased with the inclusion of Borrowers in the economy as they are constrained and to account for the aggregate consumption levels, Borrowers tend to form higher internal habits in consumption.