Year: 2006
Type: article
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.
Source: Review of Financial Studies
DOI: 10.1093/rfs/hhm043
Language: English
Topic: Housing Market and Economics
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W1504287759