Blinded by the interest rate and monetary illusions : the case of interest rate and money illusions in Financing Norwegian Housing

Money and Interest Rate Illusions in the housing market are biases affecting the behaviour of players being that they base their decisions on nominal terms rather than real terms. In turn, this can lead to over-valuation and mispricing of assets, as well as under-estimating current and future mortgage costs, also fuelling mispricing. This thesis was designed to analyse future predictions of lending interest rates and housing prices and most importantly; measure extend of money- and interest rate illusion in the booming Norwegian housing market. In April and May 2013 home-owners in Oslo was surveyed with a survey designed to measure home-owners expectations to mortgage costs and home valuations, as well as to measure the extend of interest rate- and money illusions among the sample. At the time being, the Norwegian housing market had reached unprecedented heights causing daily debates about mispricing and a possible housing bubble. The survey revealed that respondents who had bought their home some years ago clearly over-estimated the current market value of their home, and the majority had unreasonable high expectations to future price development. Further, the majority of respondents had unreasonable low expectations to future mortgage costs. Ultimately, the survey proved that a large portion of respondents was subject to money illusion, and that the vast majority were subject to two types of interest rate illusion