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House Prices, Fundamentals and Bubbles
Author(s) -
Black Angela,
Fraser Patricia,
Hoesli Martin
Publication year - 2006
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2006.00638.x
Subject(s) - economics , arbitrage , house price , value (mathematics) , momentum (technical analysis) , econometrics , economic bubble , financial economics , financial market , bubble , contrast (vision) , rational expectations , monetary economics , microeconomics , mathematics , finance , statistics , mechanics , computer science , physics , artificial intelligence
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.