Boom and Bust in Housing Market

今年頭 9個月，持貨一年內轉手的單位較去年同期激增 1.1倍，其中 84%單位屬 300萬元以下，顯示炒風已蔓延至中下價樓，「炒家利用亢奮氣氛，吸引市民入市」。

The quoted text reminds me of a paper of Burnside and et. al (2010).

http://www.econ.upenn.edu/system/files/moneymacro11102010.pdf

Burnside and et. al develop a model of boom and bust in house prices. To cut a long story short (as I always do), the model consists of the following features:-

- there are 3 types of agents, namely, infected, cured, and vulnerable, which correspond closely to "speculator", "intelligent investor", and "speculator-lured-to-be"

- in period t, t+1, t+2 ... ..., social interaction is allowed so that the infected, the cured, and the vulnerable, after interacting with each others randomly, may convert from status to status with some probabilities

- the infected has a belief that the property market will boom to state H (high state) with the timing of the boom not known

- agents with stronger beliefs are more likely to convert other agents to their beliefs

- agents take action (buy or rent property) after each round of interaction

- the market state (H or L) realized subsequently

Burnside and et. al. shows that the social dynamics would "produce a rise and fall in housing price" and they claim that the model can account for key features of the boom-bust cycle in US housing market (price booms are associated with the influx of new buyers).

Mulligan (2010) (see my previous post) proposes an alternative boom and bust story, but with reasoning differs from that of Burnside and et al. Nevertheless, there is at least one common feature between the two stories and that is "EXPECTATION MATTERS"!

By the way, why call the agents infected, cured, and vulnerable? Well, according to Rebelo, the paper's co-author, they are so named because the evolution of the fraction of population with different views is similar to that in Bernoulli's study of infectious desease spread in Europe.

I nearly laughed to death when I were told of the reason.