Forthcoming in Property Prices and Real Estate Financing in a Turbulent World, M. Balling and J. Berg, (eds.)
22 Pages Posted: 1 Feb 2013 Last revised: 7 Jul 2016
Date Written: February 1, 2013
House prices in many industrial countries increased dramatically in the years prior to 2007. Countries with the largest increases in household debt relative to income experienced the fastest run-ups in house prices over the same period. During the run-up, many economists and policymakers maintained that U.S. housing market trends could be explained by fundamentals. But in retrospect, studies now mostly attribute events to a classic bubble driven by over-optimistic projections about future house prices which, in turn, led to a collapse in lending standards. A common feature of all bubbles which complicates the job of policymakers is the emergence of seemingly-plausible fundamental arguments that seek to justify the dramatic rise in asset prices. A comparison of the U.S. housing market experience with ongoing housing market trends in Norway once again poses the question of whether a bubble can be distinguished from a rational response to fundamentals. Survey evidence on people's expectations about future house prices can be a useful tool for diagnosing a bubble. In light of the severe economic fallout from the recent financial crisis, central bank views on the use of monetary policy to lean against bubbles appear to be shifting.
Keywords: House Prices, Speculative Bubbles, Credit Growth, Expected Returns, Risk Premiums, Monetary Policy, Financial Stability
JEL Classification: D84, E32, E44, G12, O40, R31
Suggested Citation: Suggested Citation
Jurgilas, Marius and Lansing, Kevin J., Housing Bubbles and Expected Returns to Homeownership: Lessons and Policy Implications (February 1, 2013). Forthcoming in Property Prices and Real Estate Financing in a Turbulent World, M. Balling and J. Berg, (eds.). Available at SSRN: https://ssrn.com/abstract=2209719 or http://dx.doi.org/10.2139/ssrn.2209719