They would like to thank Patric Hendershott (University of Aberdeen) and Jonathan Kuhn (University of Purdue) for helpful comments on an earlier version of this paper.
House Prices, Fundamentals and Bubbles
Article first published online: 1 AUG 2006
Journal of Business Finance & Accounting
Volume 33, Issue 9-10, pages 1535–1555, November/December 2006
How to Cite
Black, A., Fraser, P. and Hoesli, M. (2006), House Prices, Fundamentals and Bubbles. Journal of Business Finance & Accounting, 33: 1535–1555. doi: 10.1111/j.1468-5957.2006.00638.x
- Issue published online: 2 NOV 2006
- Article first published online: 1 AUG 2006
- (Paper received August 2005, revised version accepted March 2006. Online publication August 2006)
- real house prices;
- real disposable income;
- present value;
- time-varying risk;
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 be driven by momentum behaviour.