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The Effect of Consumers' Expectations in a Booming Housing Market

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  • Jan Rouwendal

    ()
    (VU University Amsterdam)

  • Simonetta Longhi

    (ISER, University of Essex)

Abstract

Even though economic models have been relatively successful in explaining the long run patterns of house prices, they have more difficulties in explaining short run developments of the housing markets. However, the fact that during such ‘bubbles’ the spatial pattern of house prices, which can mainly be attributed to accessibility differences, usually remains unchanged, suggests that the irrational forces that are presumably responsible for unexplained movements in house prices obey some regularities: they seem to affect the level of house prices, but not their spatial pattern. This suggests that it is worthwhile to consider the explanatory power of psychological variables like those reflecting general (nation wide) feelings of optimism or pessimism. This paper considers the development of Dutch house prices in the years 1999 and 2000, when house prices increased fast. Existing explanations of the long run development of Dutch house prices on the basis of economic fundamentals (notably income and the mortgage interest rate) would suggest a much more modest development of house prices over these years. We also show that commonly used housing market indicators, notably the number of vacancies (houses for sale) and the time on the market, are unable to explain the development of house prices during this period. However, we find a strong relationship between the development of house prices and the Dutch index of consumer confidence.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 07-078/3.

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Date of creation: 04 Oct 2007
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Handle: RePEc:dgr:uvatin:20070078

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Keywords: House Prices; Consumer Confidence; Bubbles;

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  1. Campbell, John & Cocco, Joao, 2007. "How Do House Prices Affect Consumption? Evidence from Micro Data," Scholarly Articles 3122600, Harvard University Department of Economics.
  2. Karl E. Case & Christopher J. Mayer, 1995. "Housing price dynamics within a metropolitan area," Working Papers, Federal Reserve Bank of Boston 95-3, Federal Reserve Bank of Boston.
  3. Sydney C. Ludvigson, 2004. "Consumer Confidence and Consumer Spending," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 18(2), pages 29-50, Spring.
  4. Genesove, David & Mayer, Christopher, 2001. "Loss Aversion and Seller Behaviour: Evidence from the Housing Market," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2813, C.E.P.R. Discussion Papers.
  5. Case, Karl E. & Quigley, John M. & Shiller, Robert J., 2012. "Comparing Wealth Effects: The Stock Market versus The Housing Market," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt6px1d1sc, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  6. John R. Knight & C.F. Sirmans & Geoffrey K. Turnbull, 1994. "List price signaling and buyer behavior in the housing market," Proceedings, Federal Reserve Bank of Philadelphia, Federal Reserve Bank of Philadelphia, pages 177-195.
  7. Hill, R. Carter & Sirmans, C. F. & Knight, John R., 1999. "A random walk down main street?," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 29(1), pages 89-103, January.
  8. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 125-37, March.
  9. Horowitz, Joel L, 1992. "The Role of the List Price in Housing Markets: Theory and an Econometric Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 7(2), pages 115-29, April-Jun.
  10. Dusansky, Richard & Koc, Cagatay, 2007. "The capital gains effect in the demand for housing," Journal of Urban Economics, Elsevier, vol. 61(2), pages 287-298, March.
  11. Michael A. Arnold, 1999. "Search, Bargaining and Optimal Asking Prices," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 27(3), pages 453-481.
  12. Englund, Peter & Gordon, Tracy M. & Quigley, John M., 1999. "The Valuation of Real Capital: A Random Walk down Kungsgatan," Journal of Housing Economics, Elsevier, Elsevier, vol. 8(3), pages 205-216, September.
  13. Capozza, Dennis R. & Helsley, Robert W., 1989. "The fundamentals of land prices and urban growth," Journal of Urban Economics, Elsevier, vol. 26(3), pages 295-306, November.
  14. Dennis R. Capozza & Patric H. Hendershott & Charlotte Mack, 2004. "An Anatomy of Price Dynamics in Illiquid Markets: Analysis and Evidence from Local Housing Markets," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 32(1), pages 1-32, 03.
  15. Souleles, Nicholas S, 2004. "Expectations, Heterogeneous Forecast Errors, and Consumption: Micro Evidence from the Michigan Consumer Sentiment Surveys," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(1), pages 39-72, February.
  16. Krainer, John, 2001. "A Theory of Liquidity in Residential Real Estate Markets," Journal of Urban Economics, Elsevier, vol. 49(1), pages 32-53, January.
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