Housing cycles and their regulation: an agent-based analysis

This thesis investigates the relationships of housing market dynamics on dimensions of macrofinancial stability, consumption and affordability. Due to the strong influence of the heterogeneity of households (in terms of income, wealth, age, expectations, and motives) and housing (which varies in quality, location, and size) an agent-based housing market model is employed. The model includes heterogeneous households, a commercial bank, and a fixed housing stock, with households transitioning between renting and owning. Bid and ask prices are influenced by income, wealth, credit access, and previous transaction prices, leading to boom-bust cycles driven by price expectations and household heterogeneity.

First, this thesis examines the effects of central bank policy on the housing cycle, focusing on Loan-to-Value (LTV) caps for different borrower types. The results suggest that limiting credit access for buy-to-let investors significantly reduces debt, wealth inequality, and consumption volatility, underscoring the need for borrower-specific macroprudential policies.

Further, the financial vulnerability of indebted homeowners over the housing cycle is studied. It reveals that property purchases and dissaving impact households’ financial buffers differently across the cycle. The study also finds that past high-price purchases influence current vulnerability, leading to temporary high consumption.

Finally, the thesis explores policies for controlling house price peaks and improving housing affordability for first-time buyers. Results suggest that lowering LTV caps and increasing interest rates can reduce house prices, but also worsens affordability for first-time buyers. However, limiting LTV caps for buy-to-let investors can reduce prices while improving affordability for first-time buyers.