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House prices, fundamentals and bubbles

By Angela Black, Patricia Fraser and Martin Hoesli

Abstract

This paper studies actual (real) house prices relative to fundamental (real) house values. Such a focus is warranted since housing constitutes a large fraction of most household portfolios, and its characteristics are such that, in contrast to what prevails in financial markets, arbitrage will be limited and hence correction toward ‘true’ value is likely to be a prolonged process. Using UK data and a time-varying present value approach, our results preclude the existence of an explosive rational bubble due to non-fundamental factors. We further find that intrinsic bubbles have an important role to play in determining actual house prices although price dynamics appear to impact, particularly in periods of strong deviation from fundamental value. Price dynamics are found to by driven by momentum behaviour

Topics: real house prices, real disposable income, time-varying risk, bubbles, present value, fundamentals
Year: 2006
OAI identifier: oai:aura.abdn.ac.uk:2164/49

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