The Anatomy Of Speculation In A House Price Boom

Analyses of a speculative housing boom (see Malpezzi and Wachter, 2005) tend to treat the housing market as an indivisible whole, and so treat housing as an investment asset not dissimilar to other, more liquid, investments such as stocks and shares. However it is dissimilar. In the first place whilst households can choose to completely disinvest from shares if they think a price fall is likely, they can do so and put the money in the bank. But households have to live somewhere. Thus it is virtually impossible to invest and then completely disinvest. Further, because of the high cost of moving, both financial and emotional, most households, particularly ëmatureí households choose to remain where they are. One group can take a speculative position, however, and that is the young. They can decide to continue renting and sharing or living with their parents, or they can decide that now is the time to move out, ësettle downí and buy. Those who have bought already and wish for larger accommodation can decide that now is the time to ëtrade upí. Statistical evidence for the UK housing market allows the price of different types of dwellings to be distinguished. The evidence shows that the prices of smaller dwellings, primarily apartments, tend to be much more volatile than the prices of larger properties, primarily detached houses. Indeed whilst at the end of the last two price booms, at the end of the seventies and eighties, the price of apartments fell in money and real terms whilst the price of detached houses fell only slightly in real terms and not at all in money terms. We conclude that as prices rise younger households perceive that if they do not buy now, they may miss the opportunity to ëget on the escalatorí, and so buy into these smaller properties. When prices hesitate and start to fall this feeling of urgency vanishes and they choose to remain in their current accommodation for a while longer. What also happens is that, as prices rise, younger households who already own but who wish to move into larger accommodation find the larger properties they would wish to buy have moved beyond their reach, and so they have to settle for something smaller. This ëtrading downí also helps to ensure that the prices of smaller and middle sized properties rise faster in the boom. But when prices start to hesitate whilst incomes continue to rise, trading up becomes more feasible once again, and the prices of larger properties fall less than those of the smaller.