Regionally Heterogeneous Housing Cycles and Stabilization Policies

Housing cycles can vary significantly across regions. This study investigates the macroeconomic implications of regionally heterogeneous housing cycles and stabilization policies. The general equilibrium model includes two separate regions, idiosyncratic shocks in regional housing markets, and inter-regional housing investments by households. Counterfactual simulations suggest that regional housing cycles can be a source of economic inequality between regions and the level of financial status by affecting consumption, housing service, debt and welfare asymmetrically across agents. Region-specific stabilization policies such as property tax, countercyclical loan-to-value, and housing supply policies can mitigate regional housing cycles, but it takes large policy responses if the cycle is caused by housing exuberance (demand) shocks. Those policies also have asymmetric welfare effects, while housing supply policy is the most beneficial to agents in the region that experiences the cycle. Leaning against the wind monetary policy is relatively ineffective in stabilizing regional housing prices and higher interest rates during housing price appreciations lower the welfare of borrowers in all regions.