Heterogeneous Expectations, Boom-Bust Housing Cycles, and Supply Conditions: A Nonlinear Dynamics Approach

BERG Working Paper Series - Working Paper No. 99

63 Pages Posted: 22 Jun 2015

See all articles by Roberto Dieci

Roberto Dieci

Department of Mathematics, University of Bologna

Frank Westerhoff

University of Bamberg - Department of Economics

Date Written: February 20, 2015

Abstract

We combine a standard stock-flow housing market model, incorporating explicit relationships between house prices, the housing stock, and the rent level, with a parsimonious expectation formation scheme of housing market investors, reflecting an evolving mix of extrapolative and regressive expectation rules. The model results in a two-dimensional discrete-time nonlinear dynamical system. Based on realistic parameters, the model is able to generate endogenous boom-bust housing market dynamics with lasting periods of overvaluation and overbuilding. We thus exploit our model to investigate how real forces, in particular supply conditions, interact with expectations-driven housing market fluctuations.

Keywords: Housing markets, Speculation, Housing supply, Boom-bust cycles, Nonlinear dynamics

JEL Classification: D84, R21, R31

Suggested Citation

Dieci, Roberto and Westerhoff, Frank, Heterogeneous Expectations, Boom-Bust Housing Cycles, and Supply Conditions: A Nonlinear Dynamics Approach (February 20, 2015). BERG Working Paper Series - Working Paper No. 99, Available at SSRN: https://ssrn.com/abstract=2621005 or http://dx.doi.org/10.2139/ssrn.2621005

Roberto Dieci (Contact Author)

Department of Mathematics, University of Bologna ( email )

Piazza di Porta San Donato, 5
Bologna, I-40126
Italy

HOME PAGE: http://www.unibo.it/Faculty/default.aspx?UPN=roberto.dieci%40unibo.it

Frank Westerhoff

University of Bamberg - Department of Economics ( email )

Bamberg 96045
Germany

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