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Rational Expectations, Market Fundamentals and Housing Price Volatility

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Author Info
Jim Clayton
Abstract

This paper derives a forward-looking rational expectations house price model and empirically tests its ability to explain short-run fluctuations in real house prices. A novel approach to proxying the imputed rents of owner-occupied housing, as a function of observable housing market fundamentals, is combined with a housing market arbitrage relation to derive a present value model for real house prices. Tests of the rational expectations, nonlinear cross-equation restrictions reject the joint null hypothesis of rational expectations and the asset-based housing price model for quarterly, single-detached house prices in the city of Vancouver, British Columbia from 1979-1991. The model fails to fully capture observed house price dynamics in two real estate booms but tracks real house prices well in less volatile times, suggesting that prices may temporarily deviate from fundamental values in real estate price cycles. Copyright American Real Estate and Urban Economics Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/1540-6229.00699
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Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 24 (1996)
Issue (Month): 4 ()
Pages: 441-470
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Handle: RePEc:bla:reesec:v:24:y:1996:i:4:p:441-470

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  1. Juan Ayuso & Fernando Restoy, 2003. "House prices and rents: an equilibrium asset pricing approach," Banco de España Working Papers 0304, Banco de España. [Downloadable!]
  2. Min Hwang & John Quigley & Jae Son, 2006. "The Dividend Pricing Model: New Evidence from the Korean Housing Market," Berkeley Program on Housing and Urban Policy, Working Paper Series 1067, Berkeley Program on Housing and Urban Policy. [Downloadable!]
    Other versions:
  3. Jason Barr, 2007. "Skyscrapers and the Skyline: Manhattan, 1895-2004," Working Papers Rutgers University, Newark 2007-002, Department of Economics, Rutgers University, Newark. [Downloadable!]
  4. Juan Ayuso & Fernando Restoy, 2006. "House prices and rents in Spain: does the discount factor matter?," Banco de España Working Papers 0609, Banco de España. [Downloadable!]
  5. Koetter, Michael & Poghosyan, Tigran, 2008. "Real estate markets and bank distress," Discussion Paper Series 2: Banking and Financial Studies 2008,18, Deutsche Bundesbank, Research Centre. [Downloadable!]
  6. Juan Ayuso & Roberto Blanco & Fernando Restoy, 2006. "House prices and real interest rates in Spain," Banco de España Occasional Papers 0608, Banco de España. [Downloadable!]
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