Economic Sentiment and Its Impact on the Global Housing Market: A Behavioral Perspective

Marta Fão, Tiago Trancoso

Abstract


Purpose: This paper investigates the impact of economic sentiment, alongside key macroeconomic variables, on housing prices. It aims to illuminate the complex dynamics of the housing market, integrating the lens of Behavioral Finance to understand how sentiment influences market outcomes, providing a fresh perspective on price formation mechanisms within this sector.

Design/methodology/approach: Employing a two-stage analytical framework, the study first disentangles the Consumer Confidence Index into its fundamental (macroeconomic factors) and non-fundamental (sentiment-driven residuals) components. The second stage involves regressing the Housing Price Index against these macroeconomic variables and the distilled measure of economic sentiment. This approach builds on Lemmon & Portniaguina's (2006) methodology, enabling an examination of the interplay between economic fundamentals and sentiment in shaping housing prices. The study's international scope, encompassing a wide array of countries, allows for a robust exploration of these dynamics across diverse economic landscapes.

Findings:  The analysis reveals that economic sentiment has a notable negative impact on housing prices, diverging from some strands of the literature that found positive sentiment-price correlations within specific market segments. Macroeconomic variables such as inflation and long-term interest rates exhibit a significant relationship with housing prices, while GDP shows an unexpected negative correlation. These findings underscore the complexity of the housing market's response to economic signals and sentiment, highlighting the limitations of conventional models in fully capturing these dynamics. The study also points to the potential of integrating sentiment analysis into housing market research, offering deeper insights into price formation processes.

Originality/value: The study unveils the impact of economic sentiment on housing prices, challenging prevailing assumptions and enriching our understanding of market behavior. It provides a compelling case for the inclusion of sentiment analysis in housing market studies, suggesting new avenues for research and offering valuable insights for policymakers, investors, and academics interested in the dynamics of housing markets.

Keywords: Economic sentiment; housing market; behavioral finance.

DOI: https://doi.org/10.58869/EJABM10(1)/02


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References


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