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House Prices, Fundamentals and Inflation

Author

Listed:
  • Angela Black

    (University of Aberdeen Business School)

  • Patricia Fraser

    (University of Aberdeen Business School)

  • Martin Hoesli

Abstract

This paper studies actual house prices relative to fundamental house prices. Using UK data and a time-varying present value approach, we find that deviations of house prices fromtheir fundamental value (as warranted by real disposable income) are significant but not dominated by speculative activity; the driving force appears to be over-sensitivityto expectations over fundamentals. Our findings suggest that inflation (excluding house prices) responds asymmetrically with more impact on future inflation from turning points at peaks of overevaluation compared to turning points at troughs of underevaluation; and the turning points appear to have independent forecasting ability for inflation. This suggests that house prices have information about inflation which could be exploited by the MOnetary Policy Committee (MPC).

Suggested Citation

  • Angela Black & Patricia Fraser & Martin Hoesli, 2005. "House Prices, Fundamentals and Inflation," FAME Research Paper Series rp129, International Center for Financial Asset Management and Engineering.
  • Handle: RePEc:fam:rpseri:rp129
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    File URL: http://www.swissfinanceinstitute.ch/rp129.pdf
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    References listed on IDEAS

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    Cited by:

    1. Manuel Leon Navarro & Rafael Flores de Frutos, 2011. "Consumption and Housing Wealth Breakdown of the Effect of a Rise in Interest Rates," Post-Print hal-00687732, HAL.
    2. Christophe Blot, 2006. "Peut-on parler de bulle sur le marché immobilier au Luxembourg ?," BCL working papers 20, Central Bank of Luxembourg.

    More about this item

    Keywords

    House Prices; Fundamentals; Inflation; Monetary Policy;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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