A heterogeneous boundedly rational expectation model for housing market

  • Andrew Y. T. Leung (梁以德)Email author
  • Jia-na Xu (徐佳娜)
  • Wing Shum Tsui (崔詠芯)


This research aims to test the housing price dynamics when considering heterogeneous boundedly rational expectations such as naive expectation, adaptive expectation and biased belief. The housing market is investigated as an evolutionary system with heterogeneous and competing expectations. The results show that the dynamics of the expected housing price varies substantially when heterogeneous expectations are considered together with some other endogenous factors. Simulation results explain some stylized phenomena such as equilibrium or oscillation, convergence or divergence, and over-shooting or under-shooting. Furthermore, the results suggest that variation of the proportion of groups of agents is basically dependent on the selected strategies. It also indicates that control policies should be chosen carefully in consistence with a unique real estate market during a unique period since certain parameter portfolio may increase or suppress oscillation.

Key words

evolutionary system housing price dynamics heterogeneous expectations 

Chinese Library Classification

O29 O175.14 

2000 Mathematics Subject Classification

39A11 35G25 


  1. [1]
    Wheaton, W. C. Real estate “cycles”: some fundamentals. Real Estate Economics 27(2), 209–230 (1999)CrossRefGoogle Scholar
  2. [2]
    Poterba, J. M. Tax subsidies to owner-occupied housing: an asset-market approach. The Quarterly Journal of Economics 99(4), 729–752 (1984)CrossRefGoogle Scholar
  3. [3]
    Capozza, D. R. and Seguin, P. J. Expectations, efficiency and euphoria in the housing market. Regional Science and Urban Economics 26(3–4), 369–386 (1996)CrossRefGoogle Scholar
  4. [4]
    Clayton, J. Are housing price cycles driven by irrational expectations? Journal of Real Estate Finance and Economics 14(3), 341–363 (1997)CrossRefMathSciNetGoogle Scholar
  5. [5]
    Riddel, M. Fundamentals, feedback trading, and housing market speculation: evidence from California. Journal of Housing Economics 8(4), 272–284 (1999)CrossRefGoogle Scholar
  6. [6]
    Chan, H. L., Lee, S. K., and Woo, K. Y. Detecting rational bubbles in the residential housing markets of Hong Kong. Economic Modelling 18(1), 61–73 (2001)CrossRefGoogle Scholar
  7. [7]
    Seslen, T. N. Housing Price Dynamics and Household Mobility Decisions, Working Paper, USC lusk/FBE real estate seminar (2004)Google Scholar
  8. [8]
    McCain, R. A. Agent-Based Computer Simulation of Dichotomous Economic Growth, Kluwer Academic Publishers (1999)Google Scholar
  9. [9]
    Brock, W. A. and Hommes, C. H. Heterogeneous beliefs and routes to chaos in a simple asset pricing model. Journal of Economic Dynamics and Control 22(8–9), 1235–1274 (1998)zbMATHCrossRefMathSciNetGoogle Scholar
  10. [10]
    Brock, W. A. and Hommes, C. H. Heterogeneous beliefs and the non-linear cobweb model. Journal of Economic Dynamics and Control 24(5–7), 761–798 (2000)MathSciNetGoogle Scholar
  11. [11]
    Hanushek, E. A. and Quigley, J. M. The dynamics of the housing market: a stock adjustment model of housing adjustment. Journal of Applied Econometrics 6(1), 90–111 (1979)Google Scholar
  12. [12]
    Capozza, D. R., Hendershott, P. H., and Mack, C. An anatomy of price dynamics in illiquid markets: analysis and evidence from local housing markets. Real Estate Economics 32(1), 1–32 (2004)CrossRefGoogle Scholar
  13. [13]
    Pozdena, R. J. Do interest rates still affect housing? Economic Review 3, 3–14 (1990)Google Scholar
  14. [14]
    LeBaron, B. Evolutional and time horizons in an agent-based stock market. Macroeconomic Dynamics 5(2), 225–254 (2001)zbMATHCrossRefGoogle Scholar
  15. [15]
    Arthur, W. B., Holland, J. H., LeBaron, B., Palmer, R., and Taylor, P. Asset pricing under endogenous expectations in an artificial stock market. The Economy as an Evolving Complex System II (eds. Arthur, W. B., Durlauf, S. N., and Lane, D. A.), Addison-Wesly, 15–44 (1997)Google Scholar
  16. [16]
    Hommes, C. H. Financial markets as nonlinear adaptive evolutionary system. Quantitative Finance 1(1), 149–167 (2001)CrossRefMathSciNetGoogle Scholar
  17. [17]
    Hommes, C. H., Huang, H., and Wang, D. A. Robust rational route to randomness in a simple asset pricing model. Journal of Economic Dynamics and Control 29(6), 1043–1072 (2005)zbMATHCrossRefMathSciNetGoogle Scholar
  18. [18]
    Brock, W. A., Hommes, C. H., and Florian, O. O. W. Evolutionary dynamics in markets with many trader types. Journal of Mathematical Economics 41(1–2), 7–42 (2005)zbMATHCrossRefMathSciNetGoogle Scholar
  19. [19]
    Zheng, W. M. Positive Feedback, The Tsing Hua University Press, 334–352 (1998)Google Scholar

Copyright information

© Shanghai University and Springer Berlin Heidelberg 2009

Authors and Affiliations

  • Andrew Y. T. Leung (梁以德)
    • 1
    Email author
  • Jia-na Xu (徐佳娜)
    • 2
  • Wing Shum Tsui (崔詠芯)
    • 1
  1. 1.Department of Building and ConstructionCity University of Hong KongKowloon, Hong Kong SARP. R. China
  2. 2.Postdoctoral CentreChina Merchants Group LimitedHong Kong SARP. R. China

Personalised recommendations