Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2014-12-22
Number: 14-157/II
Author-Name: Wilko Bolt
Author-Workplace-Name: De Nederlandsche Bank, the Netherlands
Author-Name: Maria Demertzis
Author-Workplace-Name: De Nederlandsche Bank, the Netherlands, European Commission
Author-Name: Cees Diks
Author-Workplace-Name: University of Amsterdam, the Netherlands
Author-Name: Cars Hommes
Author-Workplace-Name: University of Amsterdam, the Netherlands
Author-Name: Marco van der Leij
Author-Workplace-Name: University of Amsterdam, the Netherlands
Title: Identifying Booms and Busts in House Prices under Heterogeneous Expectations
Abstract: We introduce heterogeneous expectations in a standard housing market model linking housing rental levels to fundamental buying prices. Using quarterly data we estimate the model parameters for eight different countries, US, UK, NL, JP, CH, ES, SE and BE.
We find that the data support heterogeneity in expectations, with temporary endogenous switching between fundamental mean-reverting and trend-following chartists beliefs based on their relative performance. For all countries we identify temporary house price bubbles, amplified by trend extrapolation, and crashes reinforced by fundamentalists.
The qualitative predictions of such non-linear models are very different from standard linear benchmarks, with important policy implications. The fundamental price becomes unstable, e.g. when the interest rate is set too low or mortgage tax deductions too high, giving rise to multiple non-fundamental equilibria and/or global instability.
Classification-JEL: C53, R21, R31
Keywords: housing prices, heterogenous agents model, bounded rationality, bubbles
File-Url: https://papers.tinbergen.nl/14157.pdf
File-Format: application/pdf
File-Size: 1153122 bytes
Handle: RePEc:tin:wpaper:20140157