Rational Expectations, Market Fundamentals and Housing Price Volatility

REAL ESTATE ECONOMICS, Vol. 24 No. 4 Winter 1996

Posted: 20 Dec 1996

See all articles by Jim Clayton

Jim Clayton

University of Connecticut School of Business; Cornerstone Real Estate Advisers

Abstract

This paper derives a forward-looking rational expectations house price model and empirically tests its ability to explain short-run fluctuations in real house prices. A novel approach to proxying the imputed rents of owner-occupied housing, as a function of observable housing market fundamentals, is derived and combined with a housing market arbitrage relation to derive a present value model for real house prices. Tests of the rational expectations, nonlinear cross-equation restrictions reject the joint null hypothesis of rational expectations and the asset-based housing price model for quarterly, single-detached house prices in the city of Vancouver, British Columbia, over the 1979-1991 sample period. The model fails to fully capture observed house price dynamics in two real estate booms but tracks real house prices well in less volatile times, suggesting that prices may temporarily deviate from fundamental values in real estate price cycles.

JEL Classification: R32

Suggested Citation

Clayton, James F., Rational Expectations, Market Fundamentals and Housing Price Volatility. REAL ESTATE ECONOMICS, Vol. 24 No. 4 Winter 1996, Available at SSRN: https://ssrn.com/abstract=9202

James F. Clayton (Contact Author)

University of Connecticut School of Business ( email )

Storrs, CT

Cornerstone Real Estate Advisers ( email )

One Financial Plaza, Suite 1700
Hartford, CT 06103
United States

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