Bubble Formation and Networks in Housing Markets

Abstract

This paper proposes a framework for analysing speculative bubbles in housing markets. The formation of bubbles is investigated at the sub-city level, and a bubble index is constructed showing the timeline and the intensity of speculation. The city level bubble network is examined in detail, with the global connectivity index predicting either exacerbating or autonomous bubbles, and the individual connectivity index identifying systematically important sub-markets. We illustrate our approach by using local government area level data of the Sydney and Melbourne housing markets from January 2005 to April 2016. Evidence of high intensity speculation is found in both markets from mid-2013 to the end of the sample period. While the Melbourne bubble network is an autonomous one, speculative bubbles in the Sydney market are highly interconnected, and show a spreading tendency from 2014 to 2015.