House Prices, Fundamentals and Inflation

35 Pages Posted: 20 Feb 2005

See all articles by Angela J. Black

Angela J. Black

University of Aberdeen - Business School

Patricia Fraser

Curtin University of Technology - Curtin Business School - Bentley Campus; University of Aberdeen - Business School

Martin Hoesli

University of Geneva - Geneva School of Economics and Management (GSEM); Swiss Finance Institute; University of Aberdeen - Business School

Date Written: January 2005

Abstract

This paper studies actual house prices relative to fundamental house prices. Using UK data and a time-varying present value approach, we find that deviations of house prices from their fundamental value (as warranted by real disposable income) are significant but not dominated by speculative activity; the driving force appears to be over-sensitivity to expectations about fundamentals. Our findings suggest that inflation (excluding house prices) responds asymmetrically with more impact on future inflation from turning points at peaks of overvaluation compared to turning points at troughs of undervaluation; and the turning points appear to have independent forecasting ability for inflation. This suggests that house prices have information about inflation which could be exploited by the Monetary Policy Committee (MPC).

Keywords: House prices, fundamentals, inflation, monetary policy

JEL Classification: E52, E58, R31

Suggested Citation

Black, Angela J. and Fraser, Patricia and Hoesli, Martin Edward Ralph, House Prices, Fundamentals and Inflation (January 2005). Available at SSRN: https://ssrn.com/abstract=668843 or http://dx.doi.org/10.2139/ssrn.668843

Angela J. Black (Contact Author)

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom
+44 0 1224 273316 (Phone)

Patricia Fraser

Curtin University of Technology - Curtin Business School - Bentley Campus ( email )

GPO Box U1987
Perth WA 6845
Australia

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom

Martin Edward Ralph Hoesli

University of Geneva - Geneva School of Economics and Management (GSEM) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland
+41 22 379 8122 (Phone)
+41 22 379 8104 (Fax)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom
+41 22 379 8122 (Phone)
+41 22 379 8104 (Fax)

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