House Prices, Fundamentals and Bubbles

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Abstract

This paper studies actual (real) house prices relative to fundamental (real) house values. Such a focus is warranted since housing constitutes a large fraction of most household portfolios, and its characteristics are such that, in contrast to what prevails in financial markets, arbitrage will be limited and hence correction toward 'true' value is likely to be a prolonged process. Using UK data and a time-varying present value approach, our results preclude the existence of an explosive rational bubble due to non-fundamental factors. We further find that intrinsic bubbles have an important role to play in determining actual house prices although price dynamics appear to impact, particularly in periods of strong deviation from fundamental value. Price dynamics are found to be driven by momentum behaviour.

Original languageEnglish
Pages (from-to)1535-1555
Number of pages20
JournalJournal of business finance & accounting
Volume33
Issue number9
DOIs
Publication statusPublished - Dec 2006

Keywords

  • real house prices
  • real disposable income
  • fundamentals
  • present value
  • time-varying risk
  • bubbles
  • STOCK-PRICES
  • INTRINSIC BUBBLES
  • RATIONAL BUBBLES
  • REAL-ESTATE
  • MARKET
  • MODEL
  • RISK

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