Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 232: EFFICIENCY IN HOUSING MARKETS: DO HOME BUYERS KNOW HOW TO DISCOUNT?
Erik Hjalmarsson () and Randi Hjalmarsson ()
Additional contact information
Erik Hjalmarsson: Division of International Finance, Federal Reserve Board, Postal: Mail Stop 20, Washington, DC 20551, USA.
Randi Hjalmarsson: University of Maryland, School of Public Policy, Postal: 4131 Van Munching Hall, College Park, Maryland 20742
Abstract: We test for efficiency in the market for Swedish co-ops by examining the negative relationship between the sales price and the present value of future rents. If the co-op housing market is efficient, the present value of co-op rental payments due to underlying debt obligations of the cooperative should be fully reflected in the sales price. However, we find that, on average, a one hundred kronor increase in the present value of future rents only leads to a 45 to 65 kronor reduction in the sales price; co-ops with higher rents are thus relatively overpriced compared to those with lower rents. Our analysis indicates that pricing tends to be more efficient in areas with higher educated and wealthier buyers. By relying on cross-sectional relationships in the data, our results are less sensitive to transaction costs and other frictions than time-series tests of housing market efficiency.
Keywords: Housing markets; Market efficiency; Cooperative housing
41 pages, September 30, 2006
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