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
Date Written: February 20, 2015
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: Suggested Citation