Behaviour of House Prices

“House prices are notorious for deviating from fundamentals,” states Brian M. Peterson of the Financial Stability Department with the Bank of Canada in a working paper entitled, “Fooled by Search: Housing Prices, Turnover and Bubbles.”

Some observations made in the report:

  •  House prices are volatile relative to fundamentals, such as income and rents…movements in house prices are much larger than fundamentals such as income or rents.
  •  House prices are predictable. This is the famous result of Case and Shiller (1989), where they found predictable house prices at the metropolitan level.
  •  House prices are sticky. In other words, they adjust slowly to fundamentals.
  • House prices exhibit short-run deviations from fundamentals, but long-run reversion. This is an idea of overshooting or overreaction to fundamentals.

Mr. Peterson constructs two competing models to explain how buyers and sellers interpret past prices and the “inefficient behaviour of house prices.”

You can read the report in full here

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4 responses to “Behaviour of House Prices

  1. In the housing market, people . . . . . . just do not know how to judge the overall level of prices. Much more salient in their minds is the rate of increase of prices.”

    -Robert J. Shiller, Irrational Exuberance, 2nd Ed., 2005. p. 20

  2. Hi Mike,

    I am curious to know whether you will continue your great work of compiling daily stats for calgary market. Hope HPI doesnt take away raw data from us.

    Keep up the great work…! Thanks.

    Best Regards,
    Saami

  3. Saami, I’ll definitely continue compiling the stats, especially with CREB getting rid of the median stat in their month-end report soon.

    But don’t dismiss the new MLS HPI. It’s a great additional resource. It doesn’t have a 2-month lag like Teranet’s, and we’ll now also be able to drill down to specific communities and property types to see trends in the marketplace and quickly identify turning points.

  4. Thanks Mike,

    I will have serious thought about buying house…may be by end of this year or early next year.

    Keep up the great work..!

    Have a great weekend..!

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