Housing is a closely monitored and prominent sector for households. We find that households tend to overweight house price expectations when forming inflation expectations with a coefficient of 25–45 percent, significantly above the weight of house prices in the inflation index. We first use two datasets, a multitude of controls, and an instrumental variable approach to address endogeneity. We then use a second strategy based on household heterogeneity. As expected, we find a significant effect of cognitive abilities and whether households moved house recently. We model this household behavior in a two-sector New Keynesian model with an overweighted and a non-overweighted sector and show that overweighted sectors are disproportionately more important for monetary policy.
