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Identifying booms and busts in house prices under heterogeneous expectations

Author

Listed:
  • Bolt, Wilko
  • Demertzis, Maria
  • Diks, Cees
  • Hommes, Cars
  • Leij, Marco van der
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. We find that the data support heterogeneity in expectations, with temporary endogenous switching between fundamental mean-reverting and trend-following beliefs based on their relative performance. For all countries we identify temporary, long lasting house price bubbles amplified by trend extrapolation and crashes reinforced by mean-reverting expectations. The average market sentiment may be used as an early warning signal of a (temporary) bubble regime. The qualitative predictions of such non-linear models are very different from standard linear benchmarks with important policy implications. The fundamental price becomes unstable when the interest rate is set too low or mortgage tax deductions are too high, giving rise to multiple non-fundamental equilibria and/or global instability.

Suggested Citation

  • Bolt, Wilko & Demertzis, Maria & Diks, Cees & Hommes, Cars & Leij, Marco van der, 2019. "Identifying booms and busts in house prices under heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 234-259.
    • Handle: RePEc:eee:dyncon:v:103:y:2019:i:c:p:234-259
    DOI: 10.1016/j.jedc.2019.04.003
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    More about this item

    Keywords

    House prices; Heterogeneous agents model (HAM); Bounded rationality; Bubbles; Early warning signal; Stabilizing policies;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • 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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