Asymmetric Financial Indexation and Speculative Rational Price Bubbles in the Housing Market

Mario I. Valenzuela-Silva, Jorge Martinez-Vazquez () and Jose L. Saez-Lozano
Additional contact information
Mario I. Valenzuela-Silva: Economic and Business Sciences, Universitario de la Cartuja, Spain
Jose L. Saez-Lozano: Economic and Business Sciences, Universitario de la Cartuja, Spain

International Center for Public Policy Working Paper Series, at AYSPS, GSU from International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University

Abstract: This paper analyzes the existence and persistence of residential price bubbles where housing and financial markets have asymmetric price indexation mechanisms, with an application to the case of Chile. Such a design of market institutions presents a unique dichotomy: while real estate asset prices and mortgages are usually expressed in real terms (i.e., indexed to the inflation rate), close substitutes such as house rents are expressed in nominal terms or under imperfect indexation mechanisms. This asymmetry can induce an additional risk of investing in residential assets, which in turn would put upward pressure on risk premiums in real estate investments, through higher requirements and expectations of overpricing and capital appreciation. In this paper we hypothesize that such asymmetry in the price trajectory, in a highly integrated market, favors the formation and persistence of rational speculative price bubbles. In the face of changing expectations or possible elimination of financial indexation, residential bubbles may fade away, triggering high social costs. Our empirical work uses Bayesian analysis to estimate a general equilibrium SVARX model for the new housing market using data for Chile between January 2003 and June 2022. The results validate the proposed hypothesis on the formation and persistence of rational speculative price bubbles in the presence of asymmetric price indexation mechanisms. The policy implication is that partial financial indexation, not extended to the rest of the economy, is not always desirable given the risk of significant price imbalances it may cause, especially in highly integrated markets such as finance and real estate.

Pages: 53 pages
Date: 2023-06
New Economics Papers: this item is included in nep-ure
References: Add references at CitEc
Citations:

Downloads: (external link)
https://icepp.gsu.edu/files/2023/06/paper2312.pdf (application/pdf)

Related works:
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: https://EconPapers.repec.org/RePEc:ays:ispwps:paper2312

Access Statistics for this paper

More papers in International Center for Public Policy Working Paper Series, at AYSPS, GSU from International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University Contact information at EDIRC.
Bibliographic data for series maintained by Paul Benson ().