Efficiency in Housing Markets: Do Home Buyers Know how to Discount?

Erik Hjalmarsson and Randi Hjalmarsson

No 879, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We test for efficiency in the market for Swedish co-ops by examining the negative relationship between the sales price and the present value of future monthly payments or `rents'. If the co-op housing market is efficient, the present value of co-op rental payments due to underlying debt obligations of the cooperative should be fully reflected in the sales price. However, we find that, on average, a one hundred kronor increase in the present value of future rents only leads to an approximately 75 kronor reduction in the sales price; co-ops with higher rents are thus relatively overpriced compared to those with lower rents. We also find that these inefficiencies are larger at the lower end of the housing market and in poorer, less educated regions (though they are still observed in all geographic regions). These findings appear to reflect both the role played by liquidity constraints in price formation and there being more informed and `sophisticated' buyers in higher educated areas who push prices closer to efficiency. Overall, our findings suggest that there is some systematic failure to properly discount the future stream of rent payments relative to the up front sales price.

Keywords: Housing markets; Market efficiency; Cooperative housing (search for similar items in EconPapers)
JEL-codes: G14 R21 R31 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2006
New Economics Papers: this item is included in nep-geo and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://www.federalreserve.gov/pubs/ifdp/2006/879/ifdp879r.pdf Revision (application/pdf)
https://www.federalreserve.gov/pubs/ifdp/2006/879/ifdp879.pdf Original (application/pdf)

Related works:
Working Paper: EFFICIENCY IN HOUSING MARKETS: DO HOME BUYERS KNOW HOW TO DISCOUNT? (2006)
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