- Finance Weblog - https://finance.blogs.ie.edu -

Real state prices in Spain and bad decision making

John Authers a journalist from the FT described the Spanish consumers as bad decision makers in terms of their real state buying decisions. He grounded his appreciations on arguments from behavioural finance widely discussed by Robert Shiller in his book Irrational Exuberance. Though Irrational Exuberance dealt with the dot com boom instead of the real state boom, the same principles apply. According to Shiller, traditionally the trend on housing prices has moved closely with that of rents, as any asset pricing valuation model would predict. But in the last years they have been diverging widely. Prices have increased by 182 % and rents have barely moved. This movement has been exacerbated in countries like Spain. Shiller summarizes the principles of behavioural finance that has led many to buy a house without much looking at any valuation model or economic reasoning as follows. First, homebuyers are affected by wishful thinking; they all believe their house is a winner. Second, the human brain filters and processes ideas in terms of stories rather that documented facts. Stories from relatives of friends blur our thinking on the value of housing. Last, money illusion. People only report their buying and selling prices. Transactions costs- notaries, taxes