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House Prices, Fundamentals and Bubbles

Authors

  • Angela Black,

    1. The first and second authors are from the University of Aberdeen Business School. The third author is from the University of Geneva and the University of Aberdeen Business School.
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  • Patricia Fraser,

    1. The first and second authors are from the University of Aberdeen Business School. The third author is from the University of Geneva and the University of Aberdeen Business School.
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  • Martin Hoesli

    Corresponding author
    1. The first and second authors are from the University of Aberdeen Business School. The third author is from the University of Geneva and the University of Aberdeen Business School.
      * Address for correspondence: Patricia Fraser, University of Aberdeen Business School, University of Aberdeen, Edward Wright Building, Dunbar Street, Aberdeen AB24 3QK, Scotland.
      e-mail: prof.p.fraser@abdn.ac.uk
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  • 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.

* Address for correspondence: Patricia Fraser, University of Aberdeen Business School, University of Aberdeen, Edward Wright Building, Dunbar Street, Aberdeen AB24 3QK, Scotland.
e-mail: prof.p.fraser@abdn.ac.uk

Abstract

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.

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