Expectations, Efficiency, and Euphoria in the Housing Market

Abstract

This paper studies expectations of capital appreciation in the housing market. We show that expectations impounded in rent-to-price ratio at the beginning of the decade successfully predict appreciation rates, but only if we first control for fluctuations within a transactions and information cost band. We also provide evidence of informational inefficiency: participants in housing markets appear to overreact to income growth and under-react to population growth in the prior decade.

JEL Classification: G14