Structural Breaks and the Convergence of Regional House Prices

Abstract

This paper differs from past research by examining the issue of whether regime changes have broken down the stability of the ripple effect. The endogenous two-break LM unit test, derived in Lee and Strazicich (Review of Economics and Statistics 85: 1082–1089, 2003), is used to execute the ripple effect tests. Being different from the empirical results of the conventional unit root tests without structural breaks, the empirical results of the endogenous two-break LM unit root test support the existence of ripple effects for each city in Taiwan except Taipei City. Shocks to regional house prices of Taipei City cannot “ripple out” across the nation, because Taipei City is a regional global city which has resulted in higher house prices, but does not affect the house prices of the entire area. Furthermore, the empirical evidence demonstrates the breakpoints and presents real estate policies, financial crises, and natural disease that can cause structural breaks of regional house prices.