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Heterogeneous expectations, boom-bust housing cycles, and supply conditions: A nonlinear economic dynamics approach

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  • Dieci, Roberto
  • Westerhoff, Frank

Abstract

We combine a standard stock-flow housing market model, incorporating explicit relationships between house prices, the housing stock, and the rent level, with a parsimonious expectation formation scheme of housing market investors, reflecting an evolving mix of extrapolative and regressive expectation rules. The model results in a two-dimensional discrete-time nonlinear dynamical system. Based on realistic parameters, the model is able to generate endogenous boom-bust housing market dynamics with lasting periods of overvaluation and overbuilding. We thus exploit our model to investigate how real forces, in particular supply conditions, interact with expectations-driven housing market fluctuations.

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  • Dieci, Roberto & Westerhoff, Frank, 2016. "Heterogeneous expectations, boom-bust housing cycles, and supply conditions: A nonlinear economic dynamics approach," Journal of Economic Dynamics and Control, Elsevier, vol. 71(C), pages 21-44.
    • Handle: RePEc:eee:dyncon:v:71:y:2016:i:c:p:21-44
    DOI: 10.1016/j.jedc.2016.07.011
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    More about this item

    Keywords

    Housing markets; Speculation; Housing supply; Boom-bust cycles; Nonlinear dynamics;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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