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Housing Bubbles and Expected Returns to Homeownership: Lessons and Policy Implications


Marius Jurgilas


Central Bank of Norway

Kevin J. Lansing


Federal Reserve Bank of San Francisco; Norges Bank

January 28, 2013


Abstract:     
House prices in many industrial countries increased dramatically in the years prior to 2007. Countries with the largest increases in household debt relative to income experienced the fastest run-ups in house prices over the same period. During the run-up, many economists and policymakers maintained that U.S. housing market trends could be explained by fundamentals. But in retrospect, studies now mostly attribute events to a classic bubble driven by over-optimistic projections about future house prices which, in turn, led to a collapse in lending standards. A common feature of all bubbles which complicates the job of policymakers is the emergence of seemingly-plausible fundamental arguments that seek to justify the dramatic rise in asset prices. A comparison of the U.S. housing market experience with ongoing housing market trends in Norway once again poses the question of whether a bubble can be distinguished from a rational response to fundamentals. Survey evidence on people's expectations about future house prices can be a useful tool for diagnosing a bubble. In light of the severe economic fallout from the recent financial crisis, central bank views on the use of monetary policy to lean against bubbles appear to be shifting.

Number of Pages in PDF File: 22

Keywords: House Prices, Speculative Bubbles, Credit Growth, Expected Returns, Risk Premiums, Monetary Policy, Financial Stability

JEL Classification: D84, E32, E44, G12, O40, R31

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Date posted: February 1, 2013  

Suggested Citation

Jurgilas, Marius and Lansing, Kevin J., Housing Bubbles and Expected Returns to Homeownership: Lessons and Policy Implications (January 28, 2013). Available at SSRN: http://ssrn.com/abstract=2209719 or http://dx.doi.org/10.2139/ssrn.2209719

Contact Information

Marius Jurgilas
Central Bank of Norway ( email )
P.O. Box 1179
Oslo, N-0107
Norway
Kevin J. Lansing (Contact Author)
Federal Reserve Bank of San Francisco ( email )
101 Market Street
PO Box 7702
San Francisco, CA 94105
United States
415-974-2393 (Phone)
415-977-4031 (Fax)
Norges Bank ( email )
P.O. Box 1179
Oslo, N-0107
Norway
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