Detecting Imbalances in House Prices: What Goes Up Must Come Down?*

Abstract

AbstractI suggest a toolkit of four bubble‐detection methods that can be used to monitor developments in house prices. These methods are applied to US, Finnish, and Norwegian data. For the United States, all measures unanimously suggest a bubble in the early to mid‐2000s, whereas current US house prices are found to be aligned with economic fundamentals. One of the measures indicates imbalances in Finland, while there are no signs of a bubble in Norway. I find that large parts of the US house price bubble can be explained by the sharp increase in capital inflows and the extension of loans to the subprime mortgage market.