Abstract
This paper provides new empirical evidence on housing bubble timing, volatility spillover, and bubble contagion between Japan and its economic partners, namely, the United States, the Eurozone, and the United Kingdom. First, we apply a generalized sup ADF (GSADF) test to the quarterly price-to-rent ratio from 1970Q1 to 2018Q4 to detect explosive behaviors in housing prices. Second, we analyze the volatility spillover in housing prices between Japan and its economic partners using the multivariate time-varying DCC-GARCH model. Third, we assess bubble contagion by estimating a non-parametric model of bubble migration with time-varying coefficients. We document two historical bubble episodes from 1970 to 2018 in Japan’s housing market. Moreover, we find evidence of volatility spillover effects and bubble contagion between Japan’s real estate market and its most important economic partners during several periods. In this context of market integration, countries need to develop coordinated real estate policies to address the risk of global real estate bubbles.
Highlights
A real estate bubble is defined as a sustained rise in housing prices that is not fueled by the fundamentals of the economy (Garber 1990; Flood and Hodrick 1990; Case and Shiller 2003; Shiller 2015)
From 2015 to 2018, the housing price index has risen by 8.07% in Japan while the rent index has decreased by 0.85% (OECD 2019)
Our results indicate that Japan has experienced two historical bubble episodes for the period from 1970 to 2018
Summary
A real estate bubble is defined as a sustained rise in housing prices that is not fueled by the fundamentals of the economy (Garber 1990; Flood and Hodrick 1990; Case and Shiller 2003; Shiller 2015). Since the 2008 financial crisis, several developed countries such as Japan have implemented macroprudential policies to stabilize house prices and prevent bubble episodes (Saita et al 2016; Kobayashi 2016). Concerns have been raised recently about Japanese real estate vulnerability with respect to housing prices outpacing economic fundamentals. According to the 2018 UBS1 Global Real Estate Bubble Index (UBS 2018), which gauges the risk of a property bubble based on the housing price pattern, Tokyo was ranked the most exuberant market in the world in 2018 with a score of 2.03, far above the critical score of. The 2019 Bloomberg report on the world’s housing bubbles indicated that the housing market of Japan was moderately at risk of a bubble in the first quarter of 2019
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