The formation of subjective house price expectations: the role of perceptions and local economic conditions

We provide new empirical facts on the formation of subjective expectation regarding rarely studied local house price changes. Using new survey data from Britain, a country with high homeownership rates and heterogeneous local price dynamics, we find no evidence that individuals extrapolate from realized local house prices. Rather, individuals rely on their – often incorrect – perceptions of local house prices, and on observable measures of local economic conditions. The extent to which they rely on these signals depends on local house price uncertainty and individuals’ financial sophistication. Local price uncertainty is also reflected in the second moment of subjective expectations.