Fundamentals or Trends?

This paper contributes to the discussion whether changes in house prices can be explained by fundamental factors or trends. Using a long-term time series covering 350 years of house prices along the Herengracht in Amsterdam , we examine whether a fundamental factor or a trend explains house prices and whether their explanatory power is time varying. We find that agents in the housing market switch in their formation of expectations about future changes in house prices between fundamental and momentum strategies. Specifically, we show that agents base their expectations more on fundamentals during economic slowdowns and more on recent trends or momentum during economic booms.

• View at SSRN