TY  - JOUR
AU  - Brunnermeier,Markus K.
AU  - Julliard,Christian
TI  - Money Illusion and Housing Frenzies
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12810
PY  - 2006
Y2  - December 2006
UR  - http://www.nber.org/papers/w12810
L1  - http://www.nber.org/papers/w12810.pdf
N1  - Author contact info:
Markus K. Brunnermeier
Princeton University
Department of Economics
Bendheim Center for Finance
Princeton, NJ 08540
Tel: 609/258-4050
Fax: 609/258-0771
E-Mail: markus@princeton.edu

Christian Julliard
Department of Economics
London School of Economics
and Political Science
Houghton Street
London WC2A 2AE
Tel: +44 (0) 20 7955 7510
Fax: +44 (0) 20 7955 6592
E-Mail: C.Julliard@lse.ac.uk
AB  - 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 that inflation lowers future real mortgage costs. We decompose the price-rent ratio in 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 unlikely to rationalize this finding.
ER  -