Location of Repository

Money illusion and housing frenzies

By Markus K. Brunnermeier and Christian Julliard

Abstract

A reduction in inflation can fuel run-ups in housing prices if people suffer from money illusion. For example, investors who decide whether to rent or buy a house by simply comparing monthly rent and mortgage payments do not take into account that inflation lowers future real mortgage costs. We decompose the price-rent ratio in a rational component — meant to capture the proxy effect and risk premia — and an implied mispricing. We find that inflation and nominal interest rates explain a large share of the time-series variation of the mispricing, and that the tilt effect is very unlikely to rationalize this finding

Topics: HB Economic Theory
Publisher: Centre for Economic Policy Research, London School of Economics and Political Science
Year: 2007
OAI identifier: oai:eprints.lse.ac.uk:5380
Provided by: LSE Research Online
Download PDF:
Sorry, we are unable to provide the full text but you may find it at the following location(s):
  • http://www.cepr.org/ (external link)
  • http://eprints.lse.ac.uk/5380/ (external link)
  • Suggested articles


    To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.