The Effect of Consumers' Expectations in a Booming Housing Market: Space-Time Patterns in the Netherlands, 1999-2000

Tinbergen Institute Discussion Paper No. TI 07-078/3

32 Pages Posted: 22 Oct 2007

See all articles by Jan Rouwendal

Jan Rouwendal

VU University Amsterdam - Department of Spatial Economics; Tinbergen Institute

Simonetta Longhi

University of Essex - Institute for Social and Economic Research (ISER); Institute for the Study of Labor (IZA); Tinbergen Institute

Date Written: October 2007

Abstract

Even though economic models have been relatively successful in explaining the long run patterns of house prices, they have more difficulties in explaining short run developments of the housing markets. However, the fact that during such 'bubbles' the spatial pattern of house prices, which can mainly be attributed to accessibility differences, usually remains unchanged, suggests that the irrational forces that are presumably responsible for unexplained movements in house prices obey some regularities: they seem to affect the level of house prices, but not their spatial pattern. This suggests that it is worthwhile to consider the explanatory power of psychological variables like those reflecting general (nation wide) feelings of optimism or pessimism. This paper considers the development of Dutch house prices in the years 1999 and 2000, when house prices increased fast. Existing explanations of the long run development of Dutch house prices on the basis of economic fundamentals (notably income and the mortgage interest rate) would suggest a much more modest development of house prices over these years. We also show that commonly used housing market indicators, notably the number of vacancies (houses for sale) and the time on the market, are unable to explain the development of house prices during this period. However, we find a strong relationship between the development of house prices and the Dutch index of consumer confidence.

Keywords: House Prices, Consumer Confidence, Bubbles

JEL Classification: R31, R21, D84, E31, D40

Suggested Citation

Rouwendal, Jan and Longhi, Simonetta, The Effect of Consumers' Expectations in a Booming Housing Market: Space-Time Patterns in the Netherlands, 1999-2000 (October 2007). Tinbergen Institute Discussion Paper No. TI 07-078/3, Available at SSRN: https://ssrn.com/abstract=1023652 or http://dx.doi.org/10.2139/ssrn.1023652

Jan Rouwendal (Contact Author)

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
1081HV Amsterdam
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Simonetta Longhi

University of Essex - Institute for Social and Economic Research (ISER) ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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