Title: The long-run relationship between house prices and income
Description: "The proposition that "housing prices can't continue to outpace growth in household income" (Wall Street Journal; July 25, 2002) is the received wisdom among many housing-market observers.  More formally, many in the housing literature argue that house prices and income are cointegrated.  In this paper, I show that the data do not support this view.  Standard tests using 27 years of national-level data do not find evidence of cointegration.  However, it is known that tests for cointegration have low power, especially in small samples.  I use panel-data tests for cointegration that have been shown to be more powerful than their standard time-series counterparts to test for cointegration in a panel of 95 metro areas over 23 years.  Using a bootstrap approach to allow for cross-correlations in city-level house-price shocks, I show that even these more powerful tests do not reject the hypothesis of no cointegration.  Thus the error-correction specification for house prices and income commonly found in the literature may be inappropriate"--Federal Reserve Board web site.
Subjects: Housing, Income
Places: Prices, United States