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EFFICIENCY IN HOUSING MARKETS: DO HOME BUYERS KNOW HOW TO DISCOUNT?

Erik Hjalmarsson and Randi Hjalmarsson

No 232, Working Papers in Economics from University of Gothenburg, Department of Economics

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 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 a 45 to 65 kronor reduction in the sales price; co-ops with higher rents are thus relatively overpriced compared to those with lower rents. Our analysis indicates that pricing tends to be more efficient in areas with higher educated and wealthier buyers. By relying on cross-sectional relationships in the data, our results are less sensitive to transaction costs and other frictions than time-series tests of housing market efficiency.

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: 2006-09-30
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 (2)

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Working Paper: Efficiency in Housing Markets: Do Home Buyers Know how to Discount? (2006) Downloads
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