Review of Financial Studies Vol. 21 No. 1 2008
Money Illusion and Housing Frenzies
open access
Abstract
A reduction in in ation can fuel run-ups in housing prices if people suer 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 the fact that in ation lowers future real mortgage costs. We decompose the price-rent ratio into a rational component -meant to capture the "proxy eect" and risk premia -and an implied mispricing. We nd that in ation and nominal interest rates explain a large share of the time-series variation of the mispricing, and that the tilt eect is very unlikely to rationalize this nding.
- DOI
- 10.1093/rfs/hhm043
- Volume
- 21
- Issue
- 1
- Pages
- 135-180
- Language
- en
- Sources
- crossref openalex