Stabilising house prices: the role of housing futures trading

Arzu Uluc

No 559, Bank of England working papers from Bank of England

Abstract: This study investigates the effects of housing futures trading on housing demand, house price volatility and housing bubbles in a theoretical framework. The baseline model is an application of the De Long, Shleifer, Summers and Waldmann (1990) model of noise traders to the housing market, when the risky asset is housing. This adds new features to the model as households receive utility from housing services and cannot short-sell houses. The existence of noise traders in the housing market creates uncertainty about house prices, causes prices to deviate away from their fundamental values, and leads to a distortion in housing consumption. To investigate the impact of housing derivatives trading on the housing market, a new financial instrument, housing futures, is introduced into the baseline model. Housing futures trading affects house price stability through three channels: by (i) enabling households to disentangle their housing consumption decisions from investment decisions; (ii) allowing short-selling; and (iii) attracting an additional set of traders (pure speculators) looking for portfolio diversification opportunities. The results show that, for a large set of admissible parameter values, housing futures trading decreases the volatility of house prices and increases the welfare of households and investors when noise trader (sophisticated) households are always relatively optimistic (pessimistic), and the share of pure speculators that are sophisticated is higher than the share of households that are sophisticated.

Keywords: Housing derivatives market; speculation; house price volatility; short-selling; noise traders (search for similar items in EconPapers)
JEL-codes: G13 R21 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2015-10-14
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Related works:
Journal Article: Stabilising House Prices: the Role of Housing Futures Trading (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0559

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