House Prices and Fundamentals: 355 Years of Evidence
24 Pages Posted: 28 Jul 2009 Last revised: 19 Feb 2013
Date Written: January 26, 2012
This paper examines the long run relation between prices and rents for houses in Amsterdam from 1650 through 2005. We first demonstrate that these series are cointegrated, a necessary condition for studying movements of the rent-price ratio. We then estimate the deviation of house prices from fundamentals and find that these deviations can be persistent and long-lasting. Lastly, we look at the feedback mechanisms between housing market fundamentals and prices, and find that market correction of the mispricing occurs mainly through prices not rents. This correction back to equilibrium, however, can take decades.
Keywords: house prices, rents, fundamentals, bubbles
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