Fundamentals or trends? A long-term perspective on house prices

Abstract

Using a long-term time series covering 350 years of house prices along the Herengracht in Amsterdam, we examine whether a fundamental factor or a trend explains house prices and whether their explanatory power is time varying. We find that agents in the housing market switch in their formation of expectations about future changes in house prices between fundamental and momentum strategies. Specifically, we show that agents base their expectations more on fundamentals during economic slowdowns and more on recent trends or momentum during economic booms.

Keywords:

• housing markets
• behavioural economics
• agent-based models
• historical prices

JEL Classification:

• G19
• C22

Notes

¹ Extended research by Case and Shiller (1990) with additional fundamental forecasting variables yields the same conclusion.

² An augmented Dickey–Fuller test indicates that we cannot reject the presence of a unit root in the log-prices. We therefore proceed with the first differences of the log prices, which we will refer to as the annual returns.

³ Estimation of a standard MA(1) model reveals that the coefficient on the MA(1) term equals –0.404, with SE 0.049.

⁴ van Zanden (2005) provides additional information regarding the consumer price index and its composition over time.

⁵ Using the Hannan–Quinn criterion instead of the Schwartz criterion leads to the same optimal setting.