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

Roberto Dieci and Frank Westerhoff

Journal of Economic Dynamics and Control, 2016, vol. 71, issue C, 21-44

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.

Keywords: Housing markets; Speculation; Housing supply; Boom-bust cycles; Nonlinear dynamics (search for similar items in EconPapers)
JEL-codes: D84 R21 R31 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (30)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:71:y:2016:i:c:p:21-44

DOI: 10.1016/j.jedc.2016.07.011

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