The Formation of Subjective House Price Expectations (with Joachim Winter and Sarah Kiesl-Reiter)

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Subjective house price expectations drive individual housing choices and market dynamics. We study the formation of subjective expectations about local house prices using novel survey data from the UK, a country with high homeownership rates and widely varying local housing dynamics. There is a substantial and heterogeneous perception gap and individuals extrapolate strongly from perceived rather than from actual past price changes. In addition, individuals' expectations, especially of those with low financial sophistication, are predicted by wider, easily observable measures of local economic conditions. Our results emphasize the role of heterogeneity in expectations formation processes, and their underlying information set.<u5:p></u5:p>

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