House Prices, Fundamentals and Inflation

Angela Black, Patricia Fraser and Martin Hoesli
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Patricia Fraser: University of Aberdeen Business School

FAME Research Paper Series from International Center for Financial Asset Management and Engineering

Abstract: This paper studies actual house prices relative to fundamental house prices. Using UK data and a time-varying present value approach, we find that deviations of house prices fromtheir fundamental value (as warranted by real disposable income) are significant but not dominated by speculative activity; the driving force appears to be over-sensitivityto expectations over fundamentals. Our findings suggest that inflation (excluding house prices) responds asymmetrically with more impact on future inflation from turning points at peaks of overevaluation compared to turning points at troughs of underevaluation; and the turning points appear to have independent forecasting ability for inflation. This suggests that house prices have information about inflation which could be exploited by the MOnetary Policy Committee (MPC).

Keywords: House Prices; Fundamentals; Inflation; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E52 E58 R31 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-geo, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fam:rpseri:rp129

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