Money illusion and housing frenzies

Brunnermeier, Markus K. and Julliard, Christian ORCID: 0000-0001-8177-7441 (2006) Money illusion and housing frenzies. Financial Markets Group Discussion Papers (579). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

A reduction in inflation can fuel run-ups in housing prices if people suffer from money illusion. For example, investors who decide whether to rent or buy a house by simply comparing monthly rent and mortgage payments do not take into account that inflation lowers future real mortgage costs. We decompose the price-rent ratio in a rational component — meant to capture the proxy effect and risk premia — and an implied mispricing. We find that inflation and nominal interest rates explain a large share of the time-series variation of the mispricing, and that the tilt effect is very unlikely to rationalize this finding.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://fmg.ac.uk
Additional Information:	© 2006 The Authors
Divisions:	Financial Markets Group Economics
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates R - Urban, Rural, and Regional Economics > R2 - Household Analysis
Date Deposited:	09 May 2008 15:35
Last Modified:	11 Dec 2024 18:46
URI:	http://eprints.lse.ac.uk/id/eprint/4806

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