Identifying Booms and Busts in House Prices Under Heterogeneous Expectations

43 Pages Posted: 4 Dec 2014

See all articles by Wilko Bolt

Wilko Bolt

De Nederlandsche Bank (Dutch Central Bank); VU University Amsterdam

Maria Demertzis

Bruegel

Cees G. H. Diks

University of Amsterdam - Faculty of Economics and Business (FEB); Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Cars H. Hommes

University of Amsterdam - Amsterdam School of Economics (ASE); CeNDEF; Tinbergen Institute

Marco van der Leij

CeNDEF, University of Amsterdam; Tinbergen Institute; De Nederlandsche Bank - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: December 3, 2014

Abstract

We introduce heterogeneous expectations in a standard housing market model linking housing rental levels to fundamental buying prices. Using quarterly data we estimate the model parameters for eight different countries, US, UK, NL, JP, CH, ES, SE and BE. We find that the data support heterogeneity in expectations, with temporary endogenous switching between fundamental mean-reverting and trend-following chartists beliefs based on their relative performance. For all countries we identify temporary house price bubbles, amplified by trend extrapolation, and crashes reinforced by fundamentalists. The qualitative predictions of such non-linear models are very different from standard linear benchmarks, with important policy implications. The fundamental price becomes unstable, e.g. when the interest rate is set too low or mortgage tax deductions too high, giving rise to multiple non-fundamental equilibria and/or global instability.

Keywords: housing prices, heterogenous agents model, bounded rationality, bubbles

JEL Classification: C53, R21, R31

Suggested Citation

Bolt, Wilko and Demertzis, Maria and Diks, Cees G. H. and Hommes, Cars H. and van der Leij, Marco Juri, Identifying Booms and Busts in House Prices Under Heterogeneous Expectations (December 3, 2014). De Nederlandsche Bank Working Paper No. 450. Available at SSRN: https://ssrn.com/abstract=2533426 or http://dx.doi.org/10.2139/ssrn.2533426

Wilko Bolt

De Nederlandsche Bank (Dutch Central Bank) ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Maria Demertzis

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

Cees G. H. Diks

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 53 29 (Phone)
+31 20 525 4349 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Cars H. Hommes (Contact Author)

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Center for Nonlinear Dynamics in Economics and Finance
1018 WB Amsterdam
Netherlands
+31 20 525 4246 (Phone)
+31 20 525 4349 (Fax)

CeNDEF ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands

HOME PAGE: http://www1.fee.uva.nl/cendef/

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Marco Juri van der Leij

CeNDEF, University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands
+31 20 525 7356 (Phone)

HOME PAGE: http://home.staff.uva.nl/m.j.vanderleij

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

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