House prices and household income: Do they move apart? Evidence from Taiwan

This paper investigates the equilibrium relationship between house price and household income and what causes disruptions of the equilibrium between them. By using data from Taiwan, the traditional cointegration test does not find evidence for a long-run equilibrium between them, but the stochastic break (STOPBREAK) test, which allows temporary shocks during sample periods, does obtain evidence of their equilibrium relationship. Further use of the Perron test on house price to income ratio (PIR) indicates that the PIR appears to have shifted. Finally, examining the causes of their deviation by vector autoregression (VECM) model, it was found that the slow increase in income may just sustain the long-run trend in house prices. Money supply, representing the investment demand variable, should be mainly responsible for deviation between house price and income and the shift of PIR.