Optimism in Property Markets

Abstract

House valuation involves forecasting household demand for a neighborhood, whereas commercial property valuation involves forecasting area economic activity. Yet, we show optimistic expectations for both. We investigate further possible disparities due to different cultures of home ownership, short, medium, and long-term investment horizons, and bullish or bearish trends. We use an experimental framework to demonstrate expectations are optimistic under all conditions. Buyers use trends to surmise future prices in bull markets, expect price increases in oscillating markets, and price reversals in bear markets, failing to anticipate price busts. Policy implications are important in preventing property boom-induced financial crises.