Young people expect higher future housing prices than older people

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“Younger people have experienced an almost uninterrupted sharp rise in housing prices throughout their adult lives, while older people also remember larger declines, such as the housing price falls that occurred in connection with the great Swedish banking crisis in the early 1990s”, says Erik Hjalmarsson, professor in economics at the University of Gothenburg.

In their study “Heterogeneity in households’ expectations of housing prices – evidence from micro data”, economists Erik Hjalmarsson, University of Gothenburg, and Pär Österholm, Örebro University, examine different groups’ expectations of future housing prices, based on age, education level, and gender. On average, the youngest group expect future housing price increases that are about 1 percentage point higher than what the older group expect.

Personal experiences contribute to shaping expectations

“In relation to an average expectation of approximately 5 percent price increase, 1 percentage point constitutes a relatively large proportional difference”, Erik Hjalmarsson says.

That personal experiences contribute to shaping expectations is in line with previous research on, among other things, inflation. The study has not examined whether actual housing prices are affected by expectations, but there is other research that suggest that expectations of rising prices may lead to actually rising prices.

“To the extent that people with higher future price expectations are actually willing to pay more for a home, our results mean that young people are the group that can primarily be expected to behave in that way. At the same time, young people are often first-time buyers with less financial resources. There is therefore a risk that too optimistic expectations lead to young people taking too large risks and too large mortgages in connection with home purchases”, Erik Hjalmarsson says.

Not the same results in US data

To confirm their hypothesis, the researchers compared the results from Sweden with data from the US, where housing prices in recent decades have not risen as sharply as in Sweden, showing that the same difference in expectations between young and old is not to be found in the US data.

“If you are afraid that overly optimistic expectations can lead to overinvestment and over-loaning, it is important to also study expectations at a less aggregate level, and look at young and old separately, for example. Those who formulate regulations for the housing market should be aware of this”, Erik Hjalmarsson says.