Future House Prices Research Articles

New in Town: Demographics, Immigration, and the Price of Real Estate

We link cross-sectional variation in both realized and expected state-level house price appreciation to cross-sectional variation in demographic changes. In particular, we extract two components of expected population growth: 1) a natural component due to predictable demographic changes related to fertility and mortality rates and 2) a non-natural component due to immigration. Our analysis shows that only the second component forecasts cross-sectional variation in state-level house price appreciation. We find that the sensitivity of both realized and expected returns to these demographic changes is stronger for states with greater population density, consistent with population growth actually causing the price appreciation rather than merely being correlated with some other phenomenon. We also document that building permits anticipate a portion of future population growth and house price appreciation. However, lagged measures of building activity do not subsume the ability of our expected immigration proxy to forecast price appreciation. Our findings are consistent with fundamentals driving an economically important portion of cross-sectional variation in state-level housing returns. However, markets appear to significantly underreact to the component of fundamentals that is arguably more difficult for market participants to anticipate.

House Price Volatility and the Housing Ladder

This paper investigates the effects of spatial housing price risk on housing choices over the first half of the life-cycle. Housing price risk can be substantial but, unlike other risky assets which people can avoid, most people want to eventually own their home thereby creating an insurance demand early in life. Our contribution focuses on the importance of home ownership as a hedge against future house price risk for individuals that plan to move up the housing ladder. We use a simple theoretical model to show that people living in places with higher housing price risk should own their first home at a younger age, live in larger homes, and be less likely to refinance. These predictions are shown to hold using panel data from the United States and United Kingdom.

Correlated Leverage and Its Ramifications

This paper develops a theory in which housing prices, the capital structures of banks that make mortgage loans and the capital structures of borrowers who take these loans are all endogenously determined in equilibrium. There are four main results. First, leverage is a "positively correlated" phenomenon in that high leverage among borrowers is positively correlated with high leverage among banks. Both borrower and bank leverage are higher when house prices are higher. First-time homebuyers with fixed wealth endowments must borrow more to buy more expensive homes, whereas higher current house prices rationally imply higher expected future house prices and therefore higher collateral values, inducing banks to be more highly levered. Second, higher bank leverage leads to greater volatility of house prices in response to shocks to fundamental house values. Third, a bank's exposure to credit risk depends not only on its own leverage but also on the leverage decisions of other banks. Fourth, positive fundamental shocks to house prices dilute financial intermediation by reducing banks' pre-lending screening, and this reduction in bank screening further increases house prices. Empirical and policy implications of the analysis are drawn out, and empirical evidence is provided for the first two predictions. The key policy implications are that greater geographic diversification by banks, tying mortgage tax exemptions to the duration of home ownership, and increasing bank capital requirements when borrower leverage is high can help reduce house price volatility.

Is New Zealand Facing a Baby Boomer Housing Bust?

The baby boomer generation (1946-1964) represents a population bulge that isn’t replicated in the younger generation who might be expected to live in the houses vacated by the baby boomers. Several authors have observed from 2010 there are likely to be more sellers than buyers, hence price reductions. This paper takes a contrary viewpoint. The following reasons are advanced as to why a baby boomer housing bust is unlikely to occur in New Zealand: positive demographic projections, reduced occupancy rates per dwelling, the elasticity of housing market supply, increasing numbers of investor buyers, policies relating to encouraging retirement in place, legislation underpinning the price of second hand houses, real incomes rising and intergenerational transfers. At a national level, demographic projections and housing supply characteristics are the variables most likely to influence future house prices. The paper then goes on to consider the regional implications of a baby boomer housing sell off, by examining possible future changes in housing preferences as well as trends in internal migration and regional economies.

Research notes – power of expectations

PurposeThe objective of this paper is to demonstrate that the Pygmalion hypothesis is supported in the housing market and the hypothesis that investors are, all too frequently, unrealistically over‐optimistic cannot be rejected.Design/methodology/approachThe methodology in the paper relies on a cross‐sectional questionnaire survey and a longitudinal telephone survey.FindingsThe findings in the paper demonstrate that self‐fulfilling prophecies occur in property markets. The effect of self‐fulfilling expectations is common and more powerful than rational real estate fundamentals. The consistent pattern of significant over‐forecasting of housing prices suggest that the hypothesis that investors are, most of the time, over‐confident cannot be rejected.Research limitations/implicationsIn the longitudinal survey in this paper, only limited samples were secured. The developmental change of attitudes and buying behaviors over time was not observed. People's price expectations might be different from those reported in the first three waves of survey, as real estate fundamentals change from time to time.Practical implicationsIn the paper a forward looking approach is used to solicit people's views on current and future housing prices, investment considerations and sentiment over time. An increase in property price being simply the outcome of self‐fulfilling expectations – the Pygmalion Effect will be signaled to housing participants. Studying people's confidence and sentiments helps understand speculative enthusiasm or ‘bubble”.Originality/valueThe longitudinal survey in the paper on people's price expectations is the first of its kind in Hong Kong. The results are beneficial to policy makers, homeowners, potential homebuyers and investors. Housing decisions of potential homebuyers can be made more rationally and Government officials can have more reliable property information and data for policy formulation.

Trading Rules in Housing Markets–What Can We Learn?

This paper examines the application of trading rules in testing informational efficiency in housing markets. The paper reviews and extends the work of Linneman (1986) and Londerville (1998) to an empirical analysis of Western Australian housing data. Whereas most previous studies have focused upon hedonic methods to predict future house prices, this study also incorporates repeat-sales data so that predicted and actual selling prices of individual properties are available for analysis. The results support the view that idiosyncratic information diffusion processes exist within housing markets. These processes are influenced by levels of aggregation within the data across spatial regions.

Speculative Bubbles in U.K. House Prices: Some New Evidence

In this article, we test the view, widely held among both academics and practitioners, that speculative bubbles have characterized the time series behavior of U.K. house prices in recent times. We motivate our empirical analysis using a stylized overlapping-generations model which generates a housing demand function of the form assumed by a large literature, illustrating how rational bubbles may arise as a solution to the house price determination equation. Employing two recently developed econometric techniques specifically designed to test for rational bubbles, we then provide empirical evidence for the existence of bubbles in U.K. house prices over the sample period 1983-2002. A widely held view among academics and practitioners is that the time-series behavior of house prices of several major industrialized countries may have been characterized by explosive bubbles, which are not present in the underlying fundamentals and which, therefore, may drive an explosive wedge between house prices and their fundamental determinants. In particular, with regard to the United Kingdom, a large empirical literature has studied the determinants of the two booms experienced by house prices in the early 1970s and late 1980s, providing some tentative evidence in support of the view that speculation on expected future house prices might have been an important force driving actual house prices (see, inter alia, Hendry 1984; Muellbauer and Murphy 1997; Renaud 1997; Teraisvirta 1998).' More recently, concerns of an ongoing house price bubble in the United Kingdom have been repeatedly raised by the press and policymakers. These concerns are well summarized in the following quote: It will be different this time. Those are the most dangerous words in investment and in economic policy. The U.K. is, yet again, in an unbalanced expansion. Behind it lies explosive household

A European comparison of the costs and risks of mortgages for owner-occupiers

Mortgage take-up by homeowners differs enormously across Europe. The loan-to-value and loan-to-income ratios are quite dissimilar, ranging from some 20% and 0.9 respectively in Italy to more than 90% and 3.5 respectively in some countries in northwest Europe. In addition, the mortgage characteristics vary from a short-term serial loan to a high-risk endowment mortgage based on shares. To a certain extent, a statistical comparison of the loan-to-value and loan-to-income ratios can provide a good indication of the risks that owner-occupiers run in financing their own home. At the same time, this kind of comparison ignores the causes of the risks, namely the volatility or uncertainty of future interest rates, house prices and changes in income. It also disregards the main mortgage characteristics, the cost of taking out a mortgage, and the direct and indirect subsidies, including interest deductibility, factors that have a big influence on the real costs and risks for homeowners. A Monte Carlo simulation mod...

Housing Return And Construction Cycles

This paper presents a model of a mature city that depends upon the rehabilitation of old home sites for new housing. Within the model housing returns, housing construction, mortgage loan terms, and household maintenance behavior are all endogenous. The model?s premise is that the value of a home, unlike the value of many other financial assets, depends upon the care its owner exerts on upkeep. Banks respond to this moral hazard problem by restricting the size of the loans they are willing to issue. As a result people bid what the can for housing, rather than what they may wish to. This in turn ties housing prices to changes in the endowment process which are both predictable and time varying. When endowments are growing quickly (a city with a rapidly growing economy) housing prices exhibit above market expected returns. Because banks within the model act rationally, they set mortgage terms based upon their beliefs regarding future housing prices. This leads to the empirically verified prediction that current mortgage loan to value ratios can be used to forecast future housing returns. Developers are also fully cognizant of how housing prices are set and react accordingly. When housing prices are expected to increase faster than the rate of interest developers acquire land for construction. Then once the developers believe housing returns will stop increasing they develop and sell their holdings leading to a construction boom. Thus, the model predicts that developer holdings can be used to forecast housing returns.

International Real Estate Review

The purpose of this research is to empirically test whether house price increases are an important factor in a household’s savings decisions and whether housing tenure choice and savings behavior are inter-correlated in Taiwan. Heckman's two-stage procedure for correcting sample selection bias is used in the estimation of savings function for homeowners and renters. Household survey data from 1985, 1989 and 1993 are used to compare households' saving behavior at different times. The empirical results show that in some cases the coefficients of the two different definitions of house price increases have opposite signs. These differences may be the result of different behavior motives. House price increases with respect to the price of the house itself seem to cause concern among households about future housing prices; hence, increase their savings ratio. House price increases with respect to income, however, seem to cause a wealth effect and then decreased savings ratio. Considering the complexity of households' reaction, the overall effect of house price changes on the aggregate savings ratio becomes impossible to determine.

The influence of uncertainty on house builder behaviour and residential land values

House builders are the interface between the land and housing markets, determining present land values by forecasting future house prices and construction costs. The literature establishes that land values are derived from house prices and construction costs but that this relationship may be altered by uncertainty, yet very little analysis has been provided to establish this empirically. A model of house builder behaviour is proposed and tested through detailed empirical analysis of a sample of private house building projects. Methods of estimating the development values and costs associated with individual sites are set out and rates of achieved profit are estimated. Using simulation methods, the paper demonstrates the effects of house builders' forecasting behaviour on land values, and evidence is presented that house builders' behaviour in the land and housing markets depresses the price of land. It is concluded that house builders tend to forecast conservatively with the result that land is undervalued.

House Prices, Arrears and Possessions: A Three Equation Model for the UK

The current slump in the UK housing market has coincided with record increases in mortgage arrears and possessions. Falling nominal house prices reduce the amount of unwithdrawn equity in housing and, under certain conditions, provide incentives for borrowers to accumulate arrears and for lenders to possess. However, possessions may themselves depress house prices. This paper attempts to analyse and quantify these interactions by estimating a three equation econometric model of UK mortgage arrears, possessions and house prices, in which expectations of future house prices are formed according to the rational expectations hypothesis. The model is simulated to examine the implications of interest rate changes and policies to reduce possessions.

Uncertainty, liquidity, and housing choices

This paper analyzes the housing choices of illiquid households facing uncertain future housing prices. It shows that illiquidity in the housing consumption-investment model of Henderson and Ioannides ( The American Economic Review, 1983, 73, no. 1, 98–113) causes a conflict between the housing consumption and investment motives. Consequently, (1) a higher permanent income may not make housing investment and home owning more attractive, (2) the income path affects housing choices, and (3) greater expected housing price appreciation, or lesser uncertainty as to the future price of housing, does not necessarily encourage housing investment. These results indicate the importance of controlling for household liquidity in empirical housing studies.

Housing and the Wider Economy in the Short and Long Run

Over the course of the twentieth century housing wealth in the UK has risen dramatically; recently it has become easier for households to borrow against that wealth. The process by which real housing wealth has growth—through long-term increases in the relative price of homes and substantial real investment in the stock of dwellings—has implications for the impact of financial liberalisation upon saving future house prices and bequests of housing. This article takes a long-term perspective on housing in the UK in order to answer questions of great practical importance. The interaction between savings, population changes, bequests of properly, housing investment and house prices is analysed and the forces driving these variables into the next century are assessed.

The baby boom, “pent-up” demand, and future house prices

Real house prices are forecast to rise over the next two decades by about the same amount they rose over the past two decades. The longer-run positive trends in real incomes and population size and the advance of the baby boom into ages of greater effective demand for houses are forecast to raise real house prices 10%. Simulation indicates that the demand for houses, and thus the prices of houses, may fall when baby boomers reach adulthood, because the effects of the larger population may be more than offset by the effects of the lower individual real incomes of young workers. As boomers age, their changing preferences and rising incomes raise simulated house prices above their initial levels. Simulated house prices remain above their initial levels until the baby boom generation has died off.

HOUSE PRICES AND THE ECONOMY

UK house prices more than doubled from 1985 until 1989, with house price inflation over the previous year peaking at 34 per cent in the fourth quarter of 1988. The ratio of house prices to average incomes reached levels which surpassed even those experienced during the 1972‐73 house price boom. This sharp increase in housing wealth has been a major factor in the fall in the savings ratio over the past three years. This forecast release examines the prospects for future house price movements, discusses the sources of the recent house price boom and finally considers the possible impact on consumer expenditure.

Housing prices in Metropolitan Toronto: An empirical analysis

This paper examines short-run fluctuations in real house prices in Metropolitan Toronto. We hypothesize that the average time that a house has been on the market before it is sold provides information on the expectation of future movements in real house prices. The paper combines the use of cross spectral analysis (in the frequency domain) with regression analysis (in the time domain) to examine the relationship between monthly real house prices and the average waiting times. In particular, we use a Hannan estimator to form a distributed lag function from the spectral analysis and use these results as an input to the regression model. The empirical findings support our use of waiting times as a proxy of future real house price movements.