Prices and price expectations in the market for owner occupied housing

Many researchers working with analyses and predictions of the prices of owner occupied houses have found that econometric models based on ‘economic fundamentals’ fail to explain more than a fraction of the movements of the prices. This is especially the case in periods of rapid change. Often, this failure is attributed to psychological factors such as price expectations among the market participants. This paper compares observed market prices and equilibrium prices under three different hypotheses of the formation of price expectations. The results from the investigations indicate that price expectations are formed through an extrapolation of the trend in house prices rather than through a process based on knowledge of the structure of the housing market, economic fundamentals and demographic trends.