CONSUMER SENTIMENT AND HOUSE PRICE BUBBLESweb.econ.ku.dk/eprn_epru/Conference/A_Kuchler_Consumer... · 2016-07-14 · Andreas Kuchler, Økonomisk Forskning, Økonomi og Pengepolitik.

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CONSUMER SENTIMENT AND HOUSE PRICE BUBBLES

Andreas Kuchler, Økonomisk Forskning, Økonomi og Pengepolitik

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Do non-fundamentals-based sentiments play a role in economic behaviour?

“Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits – of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” (Keynes, 1936, Chapter 12.VII, p. 161).

“The idea that economic crisis, like the current financial and housing crisis, are mainly caused by changing thought patterns goes against standard economic thinking. But the current crisis bears witness to the role of such changes in thinking. It was caused precisely by our changing confidence, temptations, envy, resentment, and illusions – and especially by changing stories about the nature of the economy. These intangibles were the reason why people paid small fortunes for houses in cornfields; why others financed those purchases; why the Dow Jones average peaked above 14,000 and a little more than a year later fell below 7,000...” (Akerlof and Shiller, 2009, p. 4).

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House prices and consumer confidence in Denmark

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House prices (year-on-year growth, per cent) Consumer confidence (net balance percentage)

Structural VAR model

Standard models used in the VAR-

based literature on monetary

transmission: GDP CPI

Short-term interest rate

SVAR-model used in study

We add: House price index Share price index

Consumer confidence



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House price development and contribution from confidence shocks

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House prices, deviation from constant growth trend Contribution from confidence shocks

Per cent

Microdata on Danish households and their expectations

Administrative registers Statistics Denmark

Data from mortgage banks

2.5 million families

Individual responses to consumer expectations survey

11,200 families pr. year (average)

during the period

2002-2013

Definition of overoptimistic households

Overoptimistic households:

• Households which are optimistic about the financial situation of the household one year in the future compared to today, and

• which during the year after being surveyed experience a reduction in real income (after tax)



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More households were overoptimistic before the crisis

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Share of overoptimistic households, per cent



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Overoptimistic households more likely to buy real estate – in particular before the crisis

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Overoptimistic households Other households

Share of households, which purchased real estate, per cent



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Overoptimistic households involved in a larger share of real estate trades before the crisis

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Overoptimistic first-time buyers Overoptimistic purchasing more expensive Other overoptimistic households

Per cent of real estate purchases



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Overoptimistic households leveraged more when purchasing real estate

Note: The figure is based on all households, which are included in the Consumer Expectations Survey, and which have purchased new real estate in the given year.

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100

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013


Median loan-to-value ratio, per cent



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Econometric evidence

Econometric evidence based on a sample of nearly 70,000 households:

The probability of house purchase was approximately 80 per cent higher for overoptimistic households than for other households before the crisis (27 per cent higher during the crisis).

Overoptimistic households, that purchased real estate before the crisis, had on average 6 percentage points higher LTV and 47 percentage points higher LTI than other households (no significant difference during the crisis).

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No relation between price-value ratio and overoptimism

Note: The left figure is based on all households, which are included in the Consumer Expectations Survey, and which have purchased new real estate in the given year. The right figure is based on households which purchased real estate in the years 2005-2007 and did not purchase or sell real estate in the years 2008-2013.

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Price/value ratio Evolution of real estate values

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2004 2005 2006 2007 2008 2009 2010 2011 2012


Median ratio of sales price to public valuation

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100

105

2007 2008 2009 2010 2011 2012 2013


Real estate value, median of index, 2007 = 100

Overoptimistic households more likely to choose IO and VR-mortgages

Interest-only loans Variable rate loans

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2009 2010 2011 2012 2013


Share of households with interest-only loans, per cent

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2009 2010 2011 2012 2013


Share of households with variable rate loans, per cent

Overoptimistic households had higher consumption and larger propensity to buy cars

Consumption rates

Car purchases

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100

105

110

2003 2005 2007 2009 2011 2013


Median consumption rate, per cent of disp. income

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2003 2005 2007 2009 2011 2013


Share of households, which purchased a car, per cent

Relation between overoptimism and probability of house purchase is robust to various definitions of overoptimism

16. juni 2016 16

Original definition:

• Households, which are optimistic about the future financial situation of the household, and

• which during the year after being surveyed experience a reduction in real income (after tax)

Alternative definition excluding households having been hit by unemployment, hospitalization, divorce or death

Alternative definitions of optimistic households (using various response categories)

Alternative definitions regarding ‘the realised future financial situation of the household’:

• Reduction in real income with a threshold (e.g. 10 per cent)

• Nominal income in stead of real income

• Wage income in stead of total income

• Reduction in liquid assets (with / without threshold)

• Combinations of the above

Conclusions

House price developments in Denmark have partly been driven by sentiments decoupled from underlying economic fundamentals, especially during strong house price booms

Macroeconometric evidence: Exogenous sentiment shocks contributed to the house price booms in both the mid-1980s and the mid-2000s

Microeconometric evidence: Overoptimistic households contributed to an upward pressure on house prices in the pre-crisis period, because they

• were more likely to purchase real estate, and

• leveraged more when purchasing real estate, compared to other households

CONSUMER SENTIMENT AND HOUSE PRICE BUBBLESweb.econ.ku.dk/eprn_epru/Conference/A_Kuchler_Consumer... · 2016-07-14 · Andreas Kuchler, Økonomisk Forskning, Økonomi og Pengepolitik.

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