Money Illusion and Housing Frenzies / Markus K. Brunnermeier, Christian Julliard.

By:

Brunnermeier, Markus K

Contributor(s):

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w12810.Publication details: Cambridge, Mass. National Bureau of Economic Research 2006.Description: 1 online resource: illustrations (black and white)Subject(s):

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

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 unlikely to rationalize this finding.

Tags from this library: No tags from this library for this title. Log in to add tags.

Average rating: 0.0 (0 votes)

Holdings
Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w12810 (Browse shelf(Opens below))	Not For Loan

Total holds: 0

Collection: Colección NBER Close shelf browser (Hides shelf browser)

Previous	No cover image available	No cover image available	No cover image available	No cover image available	No cover image available	No cover image available	No cover image available	Next
Previous	nber w12808 Measuring the Impacts of FDI in Central and Eastern Europe /	nber w12809 Do Wealth Fluctuations Generate Time-varying Risk Aversion? Micro-Evidence on Individuals' Asset Allocation /	nber w1281 Exchange Rate Dynamics with Sticky Prices: The Deutsch Mark, 1974-1982 /	nber w12810 Money Illusion and Housing Frenzies /	nber w12811 Lucky Directors /	nber w12812 Restructuring Research: Communication Costs and the Democratization of University Innovation /	nber w12813 The Economics of Hurricanes in the United States /	Next

December 2006.

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 unlikely to rationalize this finding.