Efficiency in Housing Markets: Do Home Buyers Know How to Discount?
Queen Mary - University of London, School of Economics and Finance; University of Gothenburg - Centre for Finance
University of Maryland - School of Public Policy
FRB International Finance Discussion Paper No. 879
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
Date posted: January 22, 2007
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