Citation

Discussion Paper Details

Please find the details for DP6183 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Money Illusion and Housing Frenzies

Author(s): Markus K Brunnermeier and Christian Julliard

Publication Date: March 2007

Keyword(s): behavioural finance, housing, inflation illusion, interest rate, money illusion, mortgages and real estate

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: A reduction in inflation can fuel run-ups in housing prices if people suffer from money illusion. For example, investors who decide whether to rent or buy a house by simply comparing monthly rent and mortgage payments do not take into account that inflation lowers future real mortgage costs. We decompose the price-rent ratio in a rational component ? meant to capture the proxy effect and risk premia ? and an implied mispricing. We find that inflation and nominal interest rates explain a large share of the time-series variation of the mispricing, and that the tilt effect is very unlikely to rationalize this finding.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6183

Bibliographic Reference

Brunnermeier, M and Julliard, C. 2007. 'Money Illusion and Housing Frenzies'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6183