Efficiency in Housing Markets: Do Home Buyers Know How to Discount?

47 Pages Posted: 22 Jan 2007  

Erik Hjalmarsson

University of Gothenburg - Centre for Finance

Randi Hjalmarsson

University of Maryland - School of Public Policy

Date Written: September 2006

Abstract

We test for efficiency in the market for Swedish co-ops by examining the negative relationship between the sales price and the present value of future rents. If the co-op housing market is efficient, the present value of co-op rental payments due to underlying debt obligations of the cooperative should be fully reflected in the sales price. However, we find that, on average, a one hundred kronor increase in the present value of future rents only leads to a 45 to 65 kronor reduction in the sales price; co-ops with higher rents are thus relatively overpriced compared to those with lower rents. Our analysis indicates that pricing tends to be more efficient in areas with higher educated and wealthier buyers. By relying on cross-sectional relationships in the data, our results are less sensitive to transaction costs and other frictions than time-series tests of housing market efficiency.

Keywords: Housing markets, Market efficiency, Cooperative housing

JEL Classification: G14, R21, R31

Suggested Citation

Hjalmarsson, Erik and Hjalmarsson, Randi, Efficiency in Housing Markets: Do Home Buyers Know How to Discount? (September 2006). FRB International Finance Discussion Paper No. 879. Available at SSRN: https://ssrn.com/abstract=958097 or http://dx.doi.org/10.2139/ssrn.958097

Erik Hjalmarsson (Contact Author)

University of Gothenburg - Centre for Finance ( email )

Box 640
Gothenburg, 403 50
Sweden

Randi Hjalmarsson

University of Maryland - School of Public Policy ( email )

College Park
College Park, MD 20742
United States

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