Money Illusion and Housing Frenzies

Markus K. Brunnermeier () and Christian Julliard ()

No 12810, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G12 R2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-ure
Date: 2006-12
Note: AP EFG ME
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Related works:
Working Paper: Money Illusion and Housing Frenzies (2006)
Working Paper: Money Illusion and Housing Frenzies (2007)
Journal Article: Money Illusion and Housing Frenzies (2008)
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