Abstract

Do owners' expectations about future house price growth impact the perceived value of their home? We study self-reported home values together with stated expectations. We start by assessing whether subjective home values are a reliable source for studying housing market dynamics. We derive subjective versions of price index construction techniques and compile subjective counterparts to official house price indices for several European countries and the US. We find strikingly similar price trends over extended periods of time and conclude that collectively people are well able to track price changes. Subsequently, we introduce a subjective hedonic approach that controls for price variation due to fundamentals but also includes a subjective component in the form of expectations about future price changes. We find that optimists tend to report higher values than pessimists. The more optimistic/pessimistic an owner is the larger is the effect. We find consistent results for Italy and the US, for booming and gloomy years, and for variation in the elicitation of expectations. If prices are high due to excessive expectations one speaks of a housing bubble. Hence, the individual link between perceived values and expectations indicates that owners' expectations are a meaningful measure worth monitoring for financial stability purposes.

This is joint work with Anthony Lepinteur (University of Luxembourg)