Discussion Papers no. 618

How realized home equity may work as an accelerator of house prices

Markets where buyers also are sellers

The house price level is a function of buyers' realized home equity, and buyers' realized home equity is a function of the house price level. This interdependence follows from the fact that buyers are sellers in the same market. This article examines under what conditions this leads to a possible upward-sloping demand curve with a potentially unstable equilibrium. I employ a parsimonious model with two kinds of buyers, and utilize an augmented Slusky-equation that decomposes Walrasian demand into a substitution, an income, and an endowment income effect. The model demonstrates that instability may occur if first-time buyers' demand is sufficiently inelastic, leverage is stretched, debt-financing is common, and nth-time buyers are relatively more frequent than first-time buyers. Regulation on leverage and a capital gains tax reduce the likelihood of upward-sloping demand. The article utilizes new data from Norway to examine an empirical indicator of an equity accelerator of house prices and finds that over the period 2000-2008 the value of all housing transactions exceeded the aggregate net growth of mortgages by 50%, indicating substantial equity financing. In one year, 2008, the value of aggregate housing transactions was double the growth in net mortgages.

Om publikasjonen


Markets where buyers also are sellers. How realized home equity may work as an accelerator of house prices


Erling Røed Larsen

Serie og -nummer

Discussion Papers no. 618


Statistics Norway


Discussion Papers

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Om Discussion Papers

Discussion papers comprise research papers intended for international journals and books. A preprint of a Discussion Paper may be longer and more elaborate than a standard journal article as it may include intermediate calculations, background material etc.