Preference for Housing Services and House Price Bubble Occurrence Evidence from a Macro-Experiment

Large house price bubbles can be devastating for the real economy. Therefore, understanding the conditions under which large house price bubbles occur is fundamental. We shed new light on this issue in a laboratory setting. We find that endowing subjects with a lower preference for housing services creates larger experimental house price bubbles. This is in line with the theoretical model mechanism proposed by Huber (2016). The experimental result also speaks to the empirical cross-country regularity found in Huber (2016): countries that spend a lower share of total consumption on housing services, experienced significantly larger house price bubbles during 1970-2014. This paper also contributes to the literature on experimental asset markets more generally. The paper provides a new experimental framework within which a market for the dividend of a traded asset exists. In addition, this paper provides novel design features for bringing OLG models to the laboratory.