Investors were ‘fooled by search’ in US housing, says Bank of Canada paper

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The presence of trading frictions, also known as search frictions, in the US housing market contributed to more than 70% of the increase in house prices relative to trend during the boom years of 1995 to 2006, according to a Bank of Canada paper published on February 9.

Brian Peterson, the paper's author, used a standard ordinary least squares regression to explain the behaviour of house prices in the US during that time. He found that search frictions affect asset prices, so that asset markets

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