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http://ssrn.com/abstract=958097
 
 

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


Erik Hjalmarsson


Queen Mary - University of London, School of Economics and Finance; University of Gothenburg - Centre for Finance

Randi Hjalmarsson


University of Maryland - School of Public Policy

September 2006

FRB International Finance Discussion Paper No. 879

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 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 a 45 to 65 kronor reduction in the sales price; co-ops with higher rents are thus relatively overpriced compared to those with lower rents. Our analysis indicates that pricing tends to be more efficient in areas with higher educated and wealthier buyers. By relying on cross-sectional relationships in the data, our results are less sensitive to transaction costs and other frictions than time-series tests of housing market efficiency.

Number of Pages in PDF File: 47

Keywords: Housing markets, Market efficiency, Cooperative housing

JEL Classification: G14, R21, R31

working papers series


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Date posted: January 22, 2007  

Suggested Citation

Hjalmarsson, Erik and Hjalmarsson, Randi, Efficiency in Housing Markets: Do Home Buyers Know How to Discount? (September 2006). FRB International Finance Discussion Paper No. 879. Available at SSRN: http://ssrn.com/abstract=958097 or http://dx.doi.org/10.2139/ssrn.958097

Contact Information

Erik Hjalmarsson (Contact Author)
Queen Mary - University of London, School of Economics and Finance ( email )
Mile End Road
London, E1 4NS
United Kingdom
University of Gothenburg - Centre for Finance ( email )
Box 640
Gothenburg, 403 50
Sweden
Randi Hjalmarsson
University of Maryland - School of Public Policy ( email )
College Park, MD 20742
United States
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