Explaining House Price Fluctuations

Christian Hott

Issue
2009-05

Pages
43

JEL classification
G11, G12, R21

Keywords
House Prices, Bubbles, Investor Behaviour

Year
2009

A comparison of fundamental house prices with actual prices indicates that house prices fluctuate more than fundamentally justified. This fact is very hard to explain with standard rational agent models. This paper develops a housing market model that allows to examine the price effects of various kinds of agents' expectations. In this framework I we show that the consideration of behavioural aspects like herding behaviour, speculation and momentum trading can help to explain actual house price fluctuations. Following the different approaches, agents overreact to fundamentals and are influenced by past price movements and returns.