What Was Behind the Boom and Bust in House Prices?

Interesting piece from the St. Louis Federal Reserve On the Economy Blog. House prices fell during the “great recession” in the US by 30% or more. Recent modelling shows that the main reason for the fall was that people’s beliefs about house prices had changed. It was less about a change in the demand for housing or availability of credit. In other words, if enough people think prices will rise, they will rise; but the reverse is also true.

Investment-Pic3In Australia, we still have more households believing home prices will rise in the next year, as explored in the latest Property Imperative, released yesterday. Thus, if the modelling is correct, this expectation becomes self fufilling.


The causes behind the boom and bust of house prices over the past decade or so are generally boiled down to three possible culprits:

  • Fundamental shocks, such as changes in the ability to build houses or in people’s desire to own houses
  • Credit market changes, such as looser lending restrictions allowing more people to purchase houses
  • Beliefs, or house prices increasing simply because people thought they would increase

Recent research points more strongly to one in particular: that people’s beliefs about house prices had changed.

Greg Kaplan, an economics professor at the University of Chicago, discussed this finding in his paper “Consumption and House Prices in the Great Recession: Model Meets Evidence,” presented at the St. Louis Advances in Research (STLAR) Conference on April 7-8

You can watch a video on this research here. Download a summary of the research here.

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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