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House Prices, Fundamentals and Bubbles

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  • Angela Black
  • Patricia Fraser
  • Martin Hoesli

Abstract

This paper studies actual (real) house prices relative to fundamental (real) house values. Such a focus is warranted since housing constitutes a large fraction of most household portfolios, and its characteristics are such that, in contrast to what prevails in financial markets, arbitrage will be limited and hence correction toward 'true' value is likely to be a prolonged process. Using UK data and a time-varying present value approach, our results preclude the existence of an explosive rational bubble due to non-fundamental factors. We further find that intrinsic bubbles have an important role to play in determining actual house prices although price dynamics appear to impact, particularly in periods of strong deviation from fundamental value. Price dynamics are found to be driven by momentum behaviour. Copyright 2006 The Authors Journal compilation (c) 2006 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

Volume (Year): 33 (2006-11)
Issue (Month): 9-10 ()
Pages: 1535-1555

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Handle: RePEc:bla:jbfnac:v:33:y:2006-11:i:9-10:p:1535-1555

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X

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Cited by:
  1. Erdem Basci & Ismail Saglam, 2008. "On Roots of Housing Bubbles," Working Papers, TOBB University of Economics and Technology, Department of Economics 0801, TOBB University of Economics and Technology, Department of Economics.
  2. Holinski Nils & Vermeulen Robert, 2009. "The International Wealth Effect: A Global Error-Correcting Analysis," Research Memorandum 019, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  3. Patricia Fraser & Martin Hoesli & Lynn McAlevey, 2008. "House Prices and Bubbles in New Zealand," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 37(1), pages 71-91, July.
  4. Carlos Pestana BARROS & Zhongfei CHEN & Luis A. GIL-ALANA, 2013. "Long Memory in the Housing Price Indices in China," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 3(7), pages 785-807, July.
  5. Fry, J. M., 2010. "Bubbles and crashes in finance: A phase transition from random to deterministic behaviour in prices," MPRA Paper 24778, University Library of Munich, Germany.
  6. Bourassa, Steven & Hoesli, Martin & Scognamiglio, Donato, 2010. "Housing finance, prices, and tenure in Switzerland," MPRA Paper 45990, University Library of Munich, Germany.
  7. Alberto, Montagnoli & Jun, Nagayasu, 2013. "An Investigation of Housing Affordability in the UK Regions," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2013-64, Scottish Institute for Research in Economics (SIRE).
  8. Nils Holinski & Robert Vermeulen, 2010. "The International Wealth Channel: A Global Error-Correcting Analysis," CREA Discussion Paper Series 10-04, Center for Research in Economic Analysis, University of Luxembourg.

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