Speculative behavior in a housing market: Boom and bust

We study a housing market with household buyers, speculative investors and property developers in a Walrasian scenario. We show that in addition to the factors that affect the real demand of household buyers and the development cost of property developers, investors' speculative behavior is an important factor explaining housing price evolution and dynamics. In particular, investors' extrapolative expectations may drive the housing price to persistently deviate from its benchmark value and even to explode. In contrast, investors' mean-reverting strategy can balance out the position of trend extrapolators, which may stabilize an otherwise explosive housing market. Moreover, the evolutionary process of housing prices driven by investors' speculative behavior is path-dependent in the sense that different initial market conditions may result in different price paths, which corresponds to the localization property empirically documented in the real housing market. In addition, within the stylized model, we provide some policy implications through analyzing the limitation and effectiveness of policy adjustments via down payment and development cost, and find that the decrease of development cost is a better measure to adjust the housing market when it booms or busts.