Research notes - Power of expectations

Purpose - The objective of this paper is to demonstrate that the Pygmalion hypothesis is supported in the housing market and the hypothesis that investors are, all too frequently, unrealistically over-optimistic cannot be rejected. Design/methodology/approach - The methodology in the paper relies on a cross-sectional questionnaire survey and a longitudinal telephone survey. Findings - The findings in the paper demonstrate that self-fulfilling prophecies occur in property markets. The effect of self-fulfilling expectations is common and more powerful than rational real estate fundamentals. The consistent pattern of significant over-forecasting of housing prices suggest that the hypothesis that investors are, most of the time, over-confident cannot be rejected. Research limitations/implications - In the longitudinal survey in this paper, only limited samples were secured. The developmental change of attitudes and buying behaviors over time was not observed. People's price expectations might be different from those reported in the first three waves of survey, as real estate fundamentals change from time to time. Practical implications - In the paper a forward looking approach is used to solicit people's views on current and future housing prices, investment considerations and sentiment over time. An increase in property price being simply the outcome of self-fulfilling expectations - the Pygmalion Effect will be signaled to housing participants. Studying people's confidence and sentiments helps understand speculative enthusiasm or 'bubble". Originality/value - The longitudinal survey in the paper on people's price expectations is the first of its kind in Hong Kong. The results are beneficial to policy makers, homeowners, potential homebuyers and investors. Housing decisions of potential homebuyers can be made more rationally and Government officials can have more reliable property information and data for policy formulation.