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When Speculators Meet Constructors: Positive and Negative Feedback in Experimental Housing Markets

Author

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  • Hommes, C.H.

    (University of Amsterdam)

  • Bao, T.

    (University of Groningen)

Abstract

Asset markets are characterized by positive feedback through speculative demand. But housing markets distinguish themselves from other asset markets in that the supply of housing is endogenous, and adds negative feedback to the market. We design an experimental housing market and study how the strength of the negative feedback, i.e., the supply elasticity, a ects market stability. In the absence of endogenous housing supply, the experimental markets exhibit large bubbles and crashes because speculators coordinate on trend-following expectations. When the positive feedback through speculative demand is o set by the negative feedback of elastic housing supply the market stabilizes and prices converge to fundamental value. Individual expectations and aggregate market outcome is well described by a behavioral forecasting heuristics model. Our results suggest that negative feedback policies may stabilize speculative asset bubbles.

Suggested Citation

  • Hommes, C.H. & Bao, T., 2015. "When Speculators Meet Constructors: Positive and Negative Feedback in Experimental Housing Markets," CeNDEF Working Papers 15-10, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  • Handle: RePEc:ams:ndfwpp:15-10
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    References listed on IDEAS

    as
    1. Bolt, Wilko & Demertzis, Maria & Diks, Cees & Hommes, Cars & Leij, Marco van der, 2019. "Identifying booms and busts in house prices under heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 234-259.
    2. Mikhail Anufriev & Cars Hommes, 2012. "Evolutionary Selection of Individual Expectations and Aggregate Outcomes in Asset Pricing Experiments," American Economic Journal: Microeconomics, American Economic Association, vol. 4(4), pages 35-64, November.
    3. Te Bao & Cars Hommes & Tomasz Makarewicz, 2017. "Bubble Formation and (In)Efficient Markets in Learning‐to‐forecast and optimise Experiments," Economic Journal, Royal Economic Society, vol. 127(605), pages 581-609, October.
    4. John Duffy (ed.), 2014. "Experiments in Macroeconomics," Research in Experimental Economics, Emerald Publishing Ltd, volume 17, number rexe.2014.17, July.
    5. Tiziana Assenza & Te Bao & Cars Hommes & Domenico Massaro, 2014. "Experiments on Expectations in Macroeconomics and Finance," Research in Experimental Economics, in: John Duffy (ed.), Experiments in Macroeconomics, volume 17, pages 11-70, Emerald Publishing Ltd.
    6. Clayton, Jim, 1997. "Are Housing Price Cycles Driven by Irrational Expectations?," The Journal of Real Estate Finance and Economics, Springer, vol. 14(3), pages 341-363, May.
    7. Campbell, Sean D. & Davis, Morris A. & Gallin, Joshua & Martin, Robert F., 2009. "What moves housing markets: A variance decomposition of the rent-price ratio," Journal of Urban Economics, Elsevier, vol. 66(2), pages 90-102, September.
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    Cited by:

    1. Bolt, Wilko & Demertzis, Maria & Diks, Cees & Hommes, Cars & Leij, Marco van der, 2019. "Identifying booms and busts in house prices under heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 234-259.
    2. Bao, Te & Hennequin, Myrna & Hommes, Cars & Massaro, Domenico, 2020. "Coordination on bubbles in large-group asset pricing experiments," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    3. Ling Zhang & Wenlong Bian & Hao Zhang, 2019. "Dissecting the myth of the house price in Chinese metropolises: allowing for behavioral heterogeneity among investors," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 14(4), pages 721-740, December.

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