Money Illusion and Housing Frenzies

Markus K. Brunnermeier () and Christian Julliard ()

No 6183, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 very unlikely to rationalize this finding.

Keywords: behavioural finance; housing; inflation illusion; interest rate; money illusion; mortgages; real estate (search for similar items in EconPapers)
JEL-codes: G12 R2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-geo, nep-mac, nep-mon and nep-ure
Date: 2007-03
View citations in EconPapers

Downloads: (external link)
http://www.cepr.org/pubs/dps/DP6183.asp (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Money Illusion and Housing Frenzies (2006)
Working Paper: Money Illusion and Housing Frenzies (2006)
Journal Article: Money Illusion and Housing Frenzies (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:cpr:ceprdp:6183

Ordering information: This working paper can be ordered from
http://www.cepr.org/pubs/dps/DP6183.asp

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers
Address: Centre for Economic Policy Research, 53--56 Great Sutton Street, London EC1V 0DG
Series data maintained by ().