The Effect of Consumers' Expectations in a Booming Housing Market

Jan Rouwendal, Simonetta Longhi

Research output: Working paper / PreprintWorking paperProfessional

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Abstract

Even though economic models have been relatively successful in explaining the long run patterns of house prices, they have more difficulties in explaining short run developments of the housing markets. However, the fact that during such 'bubbles' the spatial pattern of house prices, which can mainly be attributed to accessibility differences, usually remains unchanged, suggests that the irrational forces that are presumably responsible for unexplained movements in house prices obey some regularities: they seem to affect the level of house prices, but not their spatial pattern. This suggests that it is worthwhile to consider the explanatory power of psychological variables like those reflecting general (nation wide) feelings of optimism or pessimism. This paper considers the development of Dutch house prices in the years 1999 and 2000, when house prices increased fast. Existing explanations of the long run development of Dutch house prices on the basis of economic fundamentals (notably income and the mortgage interest rate) would suggest a much more modest development of house prices over these years. We also show that commonly used housing market indicators, notably the number of vacancies (houses for sale) and the time on the market, are unable to explain the development of house prices during this period. However, we find a strong relationship between the development of house prices and the Dutch index of consumer confidence.
Original languageEnglish
Place of PublicationAmsterdam
PublisherTinbergen Instituut
Publication statusPublished - 2007

Publication series

NameDiscussion paper TI
No.07-078/3

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