Journal Article

Household Overconfidence in the UK Housing Market


Using the Epstein-Zin utility in a consumption-based pricing model, we identify three explanatory variables required for the prediction of house prices – changes in consumption, stock returns, and changes in human capital. When overconfident households try to predict house prices using noisy signals for those three variables, their posterior expectation is biased such that they over-respond to those signals. UK households appear to over-respond to changes in consumption and human capital, but they do not over-respond to stock returns. Interestingly, we find that when household overconfidence is removed, house prices in London have been flat since the 2008 financial crisis, indicating that the recent house price surge in London has been driven by household overconfidence in the outlook of the economy.

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Hwang, S
Cho, Y
Shin, J

Oxford Brookes departments

Faculty of Technology, Design and Environment\School of the Built Environment


Year of publication: 2016
Date of RADAR deposit: 2016-07-28

Creative Commons License This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License

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This RADAR resource is the Accepted Manuscript of Household Overconfidence in the UK Housing Market


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