Boom in, bust out: Young households and the housing price cycle

The UK experienced a major residential real estate boom-bust cycle from the mid-1980s to the mid-1990s, accompanied by unprecedented shifts in the own er occupancy rate of young households. Previous empirical analyses have poi nted toward income changes and financial deregulation as the likely causes of this episode, with little to say about the differential effects on vario us age groups. We show that, in a life-cycle model with income heterogeneit y and credit constraints, the observed co-movements of housing prices and o wner occupancy rates can be explained as an equilibrium response to income and credit market shocks. Our findings suggest that the financial liberalis ation of the early 1980s was crucial for the unparalleled increase in the o wner occupancy rate of young households during the boom. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classification: E32; G21; R21.