Money illusion and housing frenzies

Markus K. Brunnermeier, Christian Julliard

Research output: Contribution to journalArticle

151 Scopus citations

Abstract

A reduction in inflation can fuel run-ups in housing prices if people suffer from money illusion. For example, investors who decide whether to rent or buy a house by simply comparing monthly rent and mortgage payments do not take into account the fact that inflation lowers future real mortgage costs. We decompose the price-rent ratio into a rational component-meant to capture the "proxy effect" and risk premia- and an implied mispricing. We find that inflation and nominal interest rates explain a large share of the time series variation of the mispricing, and that the tilt effect is very unlikely to rationalize this finding.

Original languageEnglish (US)
Pages (from-to)135-180
Number of pages46
JournalReview of Financial Studies
Volume21
Issue number1
DOIs
StatePublished - Jan 2008

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Money illusion and housing frenzies'. Together they form a unique fingerprint.

  • Cite this