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Efficiency in Housing Markets: Do Home Buyers Know how to Discount?

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Abstract

We test for efficiency in the market for Swedish co-ops by examining the negative relationship between the sales price and the present value of future monthly payments or `rents'. If the co-op housing market is efficient, the present value of co-op rental payments due to underlying debt obligations of the cooperative should be fully reflected in the sales price. However, we find that, on average, a one hundred kronor increase in the present value of future rents only leads to an approximately 75 kronor reduction in the sales price; co-ops with higher rents are thus relatively overpriced compared to those with lower rents. We also find that these inefficiencies are larger at the lower end of the housing market and in poorer, less educated regions (though they are still observed in all geographic regions). These findings appear to reflect both the role played by liquidity constraints in price formation and there being more informed and `sophisticated' buyers in higher educated areas who push prices closer to efficiency. Overall, our findings suggest that there is some systematic failure to properly discount the future stream of rent payments relative to the up front sales price.

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  • Erik Hjalmarsson & Randi Hjalmarsson, 2006. "Efficiency in Housing Markets: Do Home Buyers Know how to Discount?," International Finance Discussion Papers 879, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:879
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    Cited by:

    1. Khalid Sekkat & Ariane Szafarz, 2011. "Valuing Homeownership," The Journal of Real Estate Finance and Economics, Springer, vol. 43(4), pages 491-504, November.
    2. Karl Robertsen & Theis Theisen, 2011. "The Impact of Financial Arrangements and Institutional Form on Housing Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 42(3), pages 371-392, April.

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    More about this item

    Keywords

    Housing markets; Market efficiency; Cooperative housing;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • 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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