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Explaining House Price Fluctuations

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  • Christian Hott

Abstract

A comparison of fundamental house prices with actual prices indicates that house prices fluctuate more than fundamentally justified. This fact is very hard to explain with standard rational agent models. This paper develops a housing market model that allows to examine the price effects of various kinds of agents' expectations. In this framework I we show that the consideration of behavioural aspects like herding behaviour, speculation and momentum trading can help to explain actual house price fluctuations. Following the different approaches, agents overreact to fundamentals and are influenced by past price movements and returns.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2009-05.

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Length: 43 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:snb:snbwpa:2009-05

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Keywords: House Prices; Bubbles; Investor Behaviour;

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References

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  1. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing high house prices: bubbles, fundamentals, and misperceptions," Staff Reports 218, Federal Reserve Bank of New York.
  2. Muellbauer, John & Murphy, Anthony, 1997. "Booms and Busts in the UK Housing Market," Economic Journal, Royal Economic Society, vol. 107(445), pages 1701-27, November.
  3. Todd Sinai & Nicholas S. Souleles, 2005. "Owner-occupied housing as a hedge against rent risk," Working Papers 05-10, Federal Reserve Bank of Philadelphia.
  4. Jonathan McCarthy & Richard W. Peach, 2004. "Are home prices the next "bubble"?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-17.
  5. Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, vol. 88(4), pages 724-48, September.
  6. Pain, Nigel & Westaway, Peter, 1997. "Modelling structural change in the UK housing market: A comparison of alternative house price models," Economic Modelling, Elsevier, vol. 14(4), pages 587-610, October.
  7. Coakley, Jerry & Fuertes, Ana-Maria, 2006. "Valuation ratios and price deviations from fundamentals," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2325-2346, August.
  8. Dougherty, Ann & Van Order, Robert, 1982. "Inflation, Housing Costs, and the Consumer Price Index," American Economic Review, American Economic Association, vol. 72(1), pages 154-64, March.
  9. Diba, Behzad T & Grossman, Herschel I, 1988. "The Theory of Rational Bubbles in Stock Prices," Economic Journal, Royal Economic Society, vol. 98(392), pages 746-54, September.
  10. Holly, Sean & Jones, Natasha, 1997. "House prices since the 1940s: Cointegration, demography and asymmetries," Economic Modelling, Elsevier, vol. 14(4), pages 549-565, October.
  11. Levin, Eric J. & Wright, Robert E., 1997. "The impact of speculation on house prices in the United Kingdom," Economic Modelling, Elsevier, vol. 14(4), pages 567-585, October.
  12. Christian Hott & Pierre Monnin, 2008. "Fundamental Real Estate Prices: An Empirical Estimation with International Data," The Journal of Real Estate Finance and Economics, Springer, vol. 36(4), pages 427-450, May.
  13. Markus K Brunnermeier & Christian Julliard, 2006. "Money Illusion and Housing Frenzies," FMG Discussion Papers dp579, Financial Markets Group.
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Cited by:
  1. Pierdzioch, Christian & Rülke, Jan Christoph & Stadtmann, Georg, 2012. "House price forecasts in times of crisis: Do forecasters herd?," Discussion Papers 318, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
  2. Christian Hott, 2009. "Banks and Real Estate Prices," Working Papers 2009-08, Swiss National Bank.
  3. Eleonora Granziera & Sharon Kozocki, 2012. "House Price Dynamics: Fundamentals and Expectations," Working Papers 12-12, Bank of Canada.
  4. Christian Pierdzioch & Jan Christoph Rülke & Georg Stadtmann, 2012. "House Price Forecasts, Forecaster Herding, and the Recent Crisis," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 1(1), pages 16-29, November.

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