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Heterogeneous expectations, housing bubbles and tax policy

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  • Martin, Carolin
  • Schmitt, Noemi
  • Westerhoff, Frank H.

Abstract

We integrate a plausible expectation formation and learning scheme of boundedly rational investors into a standard user cost housing market model, involving a rental and a housing capital market. In particular, investors switch between heterogeneous expectation rules according to an evolutionary fitness measure, given by the rules' past profitability. We analytically show that our housing market model may produce endogenous boom-bust dynamics. Furthermore, we demonstrate that policy makers may use our model as a tool to explore how different tax policies may affect the housing market's steady state, its stability and out-of-equilibrium behavior.

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  • Martin, Carolin & Schmitt, Noemi & Westerhoff, Frank H., 2020. "Heterogeneous expectations, housing bubbles and tax policy," BERG Working Paper Series 156, Bamberg University, Bamberg Economic Research Group.
    • Handle: RePEc:zbw:bamber:156
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    5. Sarah Mignot & Fabio Tramontana & Frank Westerhoff, 2021. "Speculative asset price dynamics and wealth taxes," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(2), pages 641-667, December.
    6. Yang Tang & Kairong Hong & Yucheng Zou & Yanwei Zhang, 2021. "Impact of Emotional Perceived Value on the Uncertain Evolution of the Housing Bubble," Mathematics, MDPI, vol. 9(13), pages 1-23, July.
    7. Sahm, Marco, 2022. "Optimal accuracy of unbiased Tullock contests with two heterogeneous players," BERG Working Paper Series 175, Bamberg University, Bamberg Economic Research Group.
    8. Carro, Adrian, 2023. "Taming the housing roller coaster: The impact of macroprudential policy on the house price cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 156(C).
    9. Mundt, Philipp & Cantner, Uwe & Inoue, Hiroyasu & Savin, Ivan & Vannuccini, Simone, 2021. "Market selection in global value chains," BERG Working Paper Series 170, Bamberg University, Bamberg Economic Research Group.
    10. Philipp Mundt & Simone Alfarano & Mishael Milaković, 2022. "Survival and the Ergodicity of Corporate Profitability," Management Science, INFORMS, vol. 68(5), pages 3726-3734, May.
    11. Schulz, Jan & Mayerhoffer, Daniel M., 2021. "A network approach to consumption," BERG Working Paper Series 173, Bamberg University, Bamberg Economic Research Group.
    12. Dieci, Roberto & Mignot, Sarah & Schmitt, Noemi & Westerhoff, Frank H., 2022. "Production delays, supply distortions and endogenous price dynamics," BERG Working Paper Series 182, Bamberg University, Bamberg Economic Research Group.
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    14. Roberto Dieci & Xue-Zhong He, 2021. "Cross-section instability in financial markets: impatience, extrapolation, and switching," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(2), pages 727-754, December.
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    16. Shahab Valaei Sharif & Dawn Cassandra Parker & Paul Waddell & Ted Tsiakopoulos, 2023. "Understanding the Effects of Market Volatility on Profitability Perceptions of Housing Market Developers," JRFM, MDPI, vol. 16(10), pages 1-34, October.

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    More about this item

    Keywords

    housing markets; bubbles and crashes; heterogeneous expectations; bounded rationality and learning; tax policy; steady state and stability analysis;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • 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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