Expectations-Driven Cycles in the Housing Market

40 Pages Posted: 5 Feb 2012

See all articles by Luisa Lambertini

Luisa Lambertini

Ecole Polytechnique Fédérale de Lausanne

Maria Teresa Punzi

Vienna University of Economics and Business

Caterina Mendicino

Bank of Portugal; European Central Bank (ECB) - Directorate General Research

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Date Written: January 10, 2012

Abstract

Survey data suggests that news of changes in business conditions are significantly related to house prices and consumers' beliefs of favorable buying conditions in the housing market. This paper explores the transmission of "news shocks" as a source of boom-bust cycles in the housing market. News on shocks originated in different sectors of the economy can generate booms in the housing market in accordance with the average behavior in the data; expectations on monetary policy and in inflationary shocks that are not fulfilled can also lead to the observed subsequent macroeconomic recession. Investigating the role of the credit market for house market fluctuations we find that favorable credit conditions that are expected to be reversed in the near future generate boom-bust cycle dynamics in line with the most recent episode. Further, credit conditions also affect boom-bust cycles generated by news shocks originated in other sectors of the economy. In particular, lower loan-to-value ratios reduce the severity of expectations-driven cycles and the volatility of household debt, aggregate consumption and GDP.

Keywords: boom-bust cycles, credit frictions, housing market

JEL Classification: E32, E44, E52

Suggested Citation

Lambertini, Luisa and Punzi, Maria Teresa and Mendicino, Caterina, Expectations-Driven Cycles in the Housing Market (January 10, 2012). Bank of Finland Research Discussion Paper No. 2/2012. Available at SSRN: https://ssrn.com/abstract=1986004 or http://dx.doi.org/10.2139/ssrn.1986004

Luisa Lambertini (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland

Maria Teresa Punzi

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Caterina Mendicino

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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