Overoptimism and house price bubbles

The paper explores the significance of overoptimism for house prices in Denmark using both aggregated data from the Danish Consumer Expectations Survey as well as the underlying household-level microdata matched with administrative register data at a household level. The results indicate that house price developments are partly driven by sentiments decoupled from underlying economic fundamentals. This seems especially to have been the case during the strong house price booms in the mid-1980 s and the mid-2000 s, where overoptimism might have accounted for 15-20% of the house prices' deviation from a constant growth trend. Furthermore, overoptimistic households were more likely to purchase real estate in the 2000 s compared to other households, and they leveraged more when purchasing real estate. There seems thus to be a separate “confidence” channel in the determination of house prices in addition to the variables usually found in standard macroeconomic house-price models.