House prices rises could spread through social networks like a virus, according to a new study that suggests your Facebook friends have too much of an influence on what you pay for a house.

People whose friends are experiencing house price rises were willing to pay more for a house, according to a new working paper released by the US National Bureau of Economic Research.

"Individuals whose friends experienced larger recent house price increases are more optimistic about property investments," researchers Bailey, Cao, Kuchler and Stoebler wrote.

The research is important because it demonstrates house price growth can create a self-fulfilling cycle of more growth - separate from fundamentals like land availability.


The study, completed by researchers from Harvard, New York University and Facebook, looked at people in LA and their social networks to find the effects. Importantly, it controlled for the obvious problem that most people's friends are in the same city; the study only looked at friends who were "geographically distant".

If people's far-off friends were from places where house prices rose by 5 per cent stronger than expected in the last two years, they were more likely to buy a house by 3.1 per cent, bought a house 1.7 per cent larger, and paid 3.3 per cent more for a given house.

The sample was enormous, matching "more than 520,000 housing transactions in Los Angeles county since 1993 to the Facebook account of the respective homebuyer".

The implication for Australia is that house price growth could be spreading from city to city, simply because of beliefs.

The biggest population centres in Australia are Sydney and Melbourne, where house price rises have been strongest. Many people probably know at least a few people who live in those cities. (And as anyone who lives in those cities knows, people love to talk about house prices!)

The effect may be amplified because such a large share of the nation's news media is produced in Sydney or (like the article you are reading) Melbourne. If journalists mostly know people whose house prices rose, they might form beliefs about prices based on that.

Individuals whose friends experienced larger recent house price increases are more optimistic about property investments.


A house price dip in 2012 soon reversed. But the end of the mining boom could change everything. As the graph shows, Perth is coming off the boil.

The longer prices stay below their peaks, the more people will have sold at a loss.

That will mean more people are likely to know someone whose house price has recently fallen. That could change the tone of the conversation about house prices and thereby change what people expect house prices will do next.

If you're buying a house to live in and paying it off, it may not matter so much what prices do in the short run. But if you are just paying the interest, the trajectory of prices is vital.

You have to wonder if those borrowers have ever met anyone whose asset prices have fallen.