A comparison of fundamental house prices with actual prices indicates that house prices fluctuate more than fundamentally justified, a fact difficult to explain with standard rational agent models. The purpose of this paper is to evaluate to what extent herding behaviour among investors can be seen as an explanation for deviations of house prices from their fundamental value.
To see whether house prices fluctuate more than fundamentally justified, the paper calculates a fundamental house price and compares it to the actual price for seven European and three non‐European OECD countries. Then the paper incorporates herding behaviour into the house‐price model and examines its influence on the development of prices.
A comparison of the fundamental house prices with actual prices indicates that house prices fluctuate more than fundamentally justified. The calibration of the herding model indicates that it can help to explain fluctuations of actual house prices.
The incorporation of herding behaviour into a housing model and the calibration of its impact are the main innovations of this paper.
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