House Prices and Fundamentals: 355 Years of Evidence

Abstract

This paper examines the long‐run relation between prices and rents for houses in Amsterdam from 1650 to 2005. We estimate the deviation of house prices from fundamentals and find that these deviations can be persistent and long‐lasting. Furthermore, we look at the feedback mechanisms between housing market fundamentals and prices, and find that market correction of the mispricing occurs mainly through prices not rents. This correction back to equilibrium, however, can take decades.

Explaining House Price Dynamics: Isolating the Role of Nonfundamentals

“…For example, Harter‐Dreiman () finds that it takes about 5 years for house prices to get within 70% of the new equilibrium value in response to an income shock; the adjustment time estimated by Malpezzi () is approximately 10 years. Examining the rent–price ratio using 355 years of data on the Amsterdam housing market, Ambrose, Eichholtz, and Lindenthal () conclude from their vector error correction results that the market correction of mispricing can take decades . Nevertheless, a potential limitation of our findings is that the recent housing boom and bust is a significant portion of our study period (1990Q2–2010Q3).…”

The effect of mortgage interest deduction and mortgage characteristics on house prices

“…Gallin (2006) adopts a bootstrap approach that allows for cross-sectional dependence and shows that none of the tests rejects the null hypothesis of no cointegration in the USA. Using Australian data, Costello et al (2011) provide evidence of "sustained deviations of house prices from values warranted by income" and Ambrose et al (2013) find evidence that the correction of deviations from fundamentals can take decades using a unique data set for houses in Amsterdam from 1650 through 2005. Holly et al (2010) are able to reject the null hypothesis of no cointegration between A C C E P T E D M A N U S C R I P T house prices and income in the USA using the CIPS panel unit root test described in Pesaran (2007).…”

The U.S. housing price bubble: Bernanke versus Taylor

“…The second use of the term in the literature refers to prices deviating from fundamentals. For discussions of this variety the reader is referred to Ambrose et al (2013) and Glaeser and Nathanson (2014). In this paper, we do not argue that prices have deviated from fundamentals, but rather that fundamentals are responsible for the price run up and subsequent decline.…”