The Long-Run Relationship between House Prices and Income: Evidence from Local Housing Markets

Many in the housing literature argue that house prices and income are cointegrated [tend to increase together]. 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, standard tests for cointegration have low power, especially in small samples. I use panel-data tests for cointegration that are more powerful than their time-series counterparts to test for cointegration in a panel of 95 metro areas over 23 years…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.

Joshua Gallin

Real Estate Economics

August 15, 2006

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