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House Prices, Fundamentals and Inflation

  • Angela Black

    (University of Aberdeen Business School)

  • Patricia Fraser

    (University of Aberdeen Business School)

  • Martin Hoesli

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).

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Paper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp129.

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Date of creation: Jan 2005
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Handle: RePEc:fam:rpseri:rp129
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