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Appendix I. Data and Additional Results
Prepared by Michal Andrle (RES). The author would like to thank Cheng Hoon Lim, Ivo Krznar, Troy Matheson (all WHD), and Ben Hunt (RES) for comments and Miroslav-Kleki Plašil (Czech National Bank) for collaboration on the house-prices assessment methods. Dan Pan provided excellent research assistance.
Andrle and Plašil (2019) also develop the concept of “dynamic borrowing capacity”, where the future path of income and interest rates are reflected in household capacity to borrow, with emphasis on the financial stability.
The formula is labeled as “pricing”, rather than “valuation” due to differences between the static borrowing-capacity approach and the investment approach, see Andrle and Plašil (2019) for more details.
Should one assume that the down payment is, for simplicity, a constant fraction of income Dt = κYt the resulting estimate of the price of housing would be
Adalid and Falagiarda (2018) illustrate in detail the delayed effects of new loan origination and loan repayment on the stock of credit.
This would be a natural result with non-homothetic preferences. For instance, with Stone-Geary utility over housing, H, and other goods, C, a minimum necessary consumption of other goods, C_min, the share of housing services on total income will increase with the income, Ph*H = alpha * (Y – Pc*C_min). It will be a constant share of the “after-necessities residual income”, (Y – Pc*Qc).
The attainable house prices estimate with uniform 30 percent DSTI assumption are in Figure 2 in the Appendix.
Hamilton house prices seemed aligned with borrowing capacity of households until very recently. The recent misalignment likely reflects the commuting distance to Toronto, and a tight housing market in Toronto CMA.
Figure 2 in the Appendix presents the estimated “attainable” house prices from the SBC model under the common assumption of 30 % of after-tax median household income going to mortgage payments (at origination).
It is worthwhile noting here that exactly how house-price gaps ultimately adjust is highly uncertain, and can occur through changes in prices, changes in attainable prices, or some combination of both.