Housing Price Bubble Research Articles

Real estate prices in Kenya: is there a bubble?

This study focuses on the determinants of the prices of houses in Nairobi, Kenya. The study finds housing prices to have positive relationships with GDP, diaspora remittances, lending rates, loans to real estate sector and cost of construction. A negative relationship exists between the house prices and inflation. Results of the cointegration tests indicate the existence of stable long-run relationships between house prices and each of GDP and NSE Index, while unstable relationships are reported for diaspora remittances and building costs. Using fractional integration, the results show higher orders of integration for the house price series compared with the other variables, though the study is indifferent about the existence of a house price bubble. Granger causality tests indicate there are no causal relationships between house prices and diaspora remittances. However, there are two way causalities between house prices and each of GDP, building costs and NSE Index. This negates the existence of a house price bubble.

Keeping up with the Joneses: How Households Fared in the Era of High Income Inequality and the Housing Price Bubble, 1999–2007

Sociologists conceptualize lifestyles as structured hierarchically where people seek to emulate those higher up. Growing income inequality in the United States means those at the top bid up the price of valued goods like housing and those in lower groups have struggled to maintain their relative positions. We explore this process in the context of the U.S. housing market from 1999 to 2007 by analyzing over 4,000 residential moves from the Panel Study of Income Dynamics. Houses are the ultimate status symbol. Their size, quality, and location signal to others that one has (or has not) arrived. We show that in areas where income inequality was higher, all movers went deeper into debt and increased their monthly housing costs to live in more desirable neighborhoods. But because people at the top of the income distribution had so much more money, they were able to take on less debt to keep their position in the status queue. Everyone below them who made a move to buy a house took on more debt, particularly in areas with higher income inequality. This evidence suggests that growing inequality implies that those at the top buy the best homes while others struggle to keep pace amid rising housing costs.

Determinants of house prices and new construction activity: An empirical investigation of the Namibian housing market

The demand for and supply of housing are heterogeneous and differ across countries, provinces and cities. In the Namibian context, the housing market has experienced a substantial increase in house prices. Such an unexpected growth rate in house prices suggests that the Namibian housing market may not be sustainable in the long term. This means that there is a high probability of a housing price bubble in Namibia if the house prices continue to increase. The aim of this study was to conduct an econometric analysis of endogenous and exogenous determinants of house prices and new construction activity in Namibia. This study also attempted to establish whether there is evidence of overvaluation of house prices in the Namibian housing market and this is important in identifying the possibility of a housing price bubble in Namibia. In addition, the study is relevant during the current period where Namibia is faced with a continuous increase in house prices. A restricted VAR model with a Johansen cointegration approach was used to analyse monthly data from January 2000 to December 2014. The selection of the data set was aimed at providing representatives for various housing demand drivers and housing supply determinants. For modelling on the supply side, new construction investment as a percentage of GDP was employed. The other variables incorporated as exogenous variables include the economic growth rate, the consumer price index, nominal wages as a percentage of GDP, the short-term interest rate, mortgage loans as a share of GDP and population in the 15-64 cohort as a percentage of GDP. Results show that the house price index in Namibia has proved more sensitive to changes in population, mortgage loans and inflation; whereas the construction activities were found to be more sensitive to the house price index and inflation. Granger causality results show that there is a bidirectional causality between the house price index and new construction activity in Namibia. The study therefore found evidence of overvaluation of house prices in the Namibian housing market, which may lead to a house price bubble in the Namibian economy. Namibian policymakers, through the Bank of Namibia, should come up with policies which ensure that the majority of mortgages given by the banks are for constructing new houses instead of financing the purchase of existing houses.

Empirical Analysis of House Price Bubble: A Case Study on Malaysia

The main objective of this research is to investigate the relationship between house price with macroeconomics variables - Gross Domestic Product per capita, inflation rate, Base Lending Rate and amount of household loan disbursed for purchase of residential properties. We try to use these variables to examine if they could trigger a housing bubble to burst in Malaysia. Granger Causality results show that there is univariate relationship from house price to Gross Domestic Product per capita. Though house price and other macroeconomics variables do not Granger–cause each other in short run, but these variables are cointegrated in the long run, i.e. there is no evidence of house price bubble in Malaysia. We suggest that soaring house prices in Malaysia is being supported by the large inflow of foreign funds into the housing sector and the unresponsive supply of houses.

Housing price bubbles, new supply, and within-city dynamics

Although there is broad recognition that cities differ in their tendency to experience house price bubbles, most studies assume away any possibility of within-city heterogeneity in response to a bubble. We develop a model that suggests that this assumption may be appropriate when markets are rising but can be far from reality on the bust side of a bubble. During a housing boom, new construction and related supply adjustments by developers ensure stable relative prices between low- and high-quality segments of the housing market. On the bust side of a bubble, however, reduced housing starts allow demand-side forces and mortgage default to create pressure for relative prices to diverge across market segments. Absent a change in technology, as markets recover and new construction rebounds, relative prices should revert back to pre-crash levels. Evidence based on 2000–2013 single-family home sales in Phoenix, Arizona supports this modeling framework. Additional evidence also suggests that high rates of mortgage default contributed to divergence in relative prices when markets crashed.

Dynamic Analyses for Transmission between Asset Bubble Trends of Accumulated Co‐integration Errors

AbstractWe analyze how the bubble trends of different asset prices are dynamically transmitted between one another under a co‐integrated VAR model. The vector bubble trends are defined by a random walk trend derived from Beveridge‐Nelson decomposition allowing a co‐integration between multiple asset prices and their fundamentals. This I(1) bubble trend is connected to the no‐arbitrage condition for efficient asset pricing and is composed of Accumulated Cointegration Error (ACE). Under this setup, we may conduct dynamic analyses of the vector ACE bubble trends, which enables us to assess the interrelationships of bubbles of different assets and the dynamic role of bubbles in asset pricing. It may be critical for a preemptive policy reaction to block any possible contagion of an asset price bubble that might be harmful to the economy. Using the monthly data of the U.S. and impulse response analyses, we empirically find that (i) there are ACE bubble trends in both stock and housing prices; (ii) the stock and housing price bubbles are highly correlated with one another; (iii) stock prices are more bubble‐dependent than housing prices; and (iv) the stock bubble affects the housing bubble, but the reverse case does not hold.

Dynamic Stochastic General EQUILIBRIUM ‐ BASED Assessment of Nonlinear Macroprudential Policies: Evidence from Hong Kong

AbstractIn the wake of the 2008–2009 global financial crisis, the macroeconomic discussion has returned to the topic of proactive macroprudential policies. The use of loan‐to‐value (LTV) policies to curb booming property markets has long been used by Hong Kong's monetary authorities to actively manage the potential fallout from housing price bubbles. In 2013 the Hong Kong authorities supplemented the LTV policies with property transfer taxes. Here, we also analyse the merits of these tax‐based macroprudential policies in the dynamic stochastic general equilibrium framework. Furthermore, we calibrate the impact of both countercyclical macroprudential policies employed in conjunction with forward guidance. We conclude that both policy approaches can limit the pace of housing price increases. As regards the comparison of LTV and tax‐based measures, it turns out that property acquisition taxes are more effective.

Dating the Timeline of House Price Bubbles in Australian Capital Cities

House prices in some Australian capital cities have recently been on the rise to the extent that some describe this as an emerging bubble, but this claim remains formally untested to date. We apply a recently developed time series procedure to detect, and time‐stamp, bubbles in house price to rent ratios in Australian capital cities. The results show a sustained, yet varying, degree of speculative behaviour in all capital cities in the 2000s before the 2008 global financial crisis (GFC) engulfing different housing markets. The onset of these bubbles was soon after the federal government introduced a major change to the capital gains tax law, and all of these bubbles collapsed with or before the GFC. As of January 2016 only Sydney exhibits significant evidence of an exuberant rise in house prices compared to rents. We believe that the method we apply has the potential to be a general early warning indicator to detect housing bubbles in other countries/markets. We provide the programming files to enable researchers to implement this test in other countries.

Credit availability, macroprudential regulations and the house price-to-rent ratio

Quantifying the real economy effects of macroprudential policy is important at a time when such measures are increasingly being promoted as central to the prevention of future credit and house price bubbles. Recently, like other regulatory authorities, the Irish central bank introduced regulatory limits on mortgage lending aimed at protecting greater financial stability. In this paper, we seek to examine some of the wider implications of these measures for tenure choice in the Irish housing market. We find that a reduction in the loan-to-value ratio, such as may occur as a result of regulatory limits, will lead to a greater demand for rental accommodation, prompting higher rents for a given house price level. While this result is somewhat incidental to financial stability, it does have significant implications for housing policy, particularly, at a time when the Irish housing market is confronted by an acknowledged supply shortage.

Have the edges of homeownership in Spain proved to be resilient after the Global Financial Crisis?

The direct effect that an exogenous shock like the global financial crisis (GFC) had on the border between one form of tenure and another is particularly interesting in countries were owner-occupancy predominates. Right before the GFC, Spain was experiencing a major housing price bubble, allowing great expectations on housing equity gains together with extremely high numbers of mortgage-indebted households. The GFC represented a major threat for those households at the edges as their financial fragility increased. The aim of this paper is to identify why the edges of ownership in Spain came to be so precarious after the GFC and to assess how resilience is improved (considering both vulnerable households affected by the crisis and those that may be affected later) by securing the future of the edges of homeownership and reducing the volatility observed in an ownership-centred housing market. We will use the MDSR (Mortgage Debt Service Ratio) as an indicator of the higher vulnerability of those on the edges of homeownership. Looking at the consequences at the edges of the GFC in a home-ownership dominated market will provide the arguments for drawing up policies and actions for a new long-term tenure scenario in Spain.

Icelandic boom and bust: immigration and the housing market

The housing market boom in Iceland in 2004–2007 was driven by international and domestic developments. A simple demand and supply model is fitted to data through the recent boom–bust period. The price equation (demand) is improved by including net immigration as an explanatory variable showing that demographic factors, in addition to mortgage market restructuring, help in explaining swings in the housing market. Evidence of a house price bubble is no longer detected when accounting for the effects of immigration with 1 per cent net immigration yielding a 4–6 per cent rise in house prices. Accuracy in forecasting house price developments is improved by accounting for housing investment behaviour in a separate (supply) equation. The sharp fall in housing investment in 2009 cannot, however, be modelled without the introduction of a dummy variable, accounting for the sudden stop in financing as the Icelandic banking sector failed in late 2008.

Measuring House Price Bubbles

AbstractUsing data for six metropolitan housing markets in three countries, this article provides a comparison of methods used to measure house price bubbles. We use an asset pricing approach to identify bubble periods retrospectively and then compare those results with results produced by six other methods. We also apply the various methods recursively to assess their ability to identify bubbles as they form. In view of the complexity of the asset pricing approach, we conclude that a simple price–rent ratio measure is a reliable method both ex post and in real time. Our results have important policy implications because a reliable signal that a bubble is forming could be used to avoid further house price increases.

China's housing bubble burst?

AbstractIn this paper, we developed the recursive unit root tests to identify the beginning and end of potential speculative bubbles in the Chinese housing price cycles during 2006–2013 for the 70 major cities of China. The method is best suited for a practical implementation with a time series and delivers a consistent date‐stamping strategy for the origination and termination of multiple bubbles. Simulations demonstrate that the test significantly improves discriminatory power and leads to distinct power gains when multiple bubbles occur. Overall, the results indicate that the speculative housing price bubbles in China are not bursting, and they indicate that the stationarity of the housing price level varies across the different city sizes. Between the cities, approximately one‐fourth of the bubbles have burst up to December 2013, while the first‐tier city bubble may not burst due to the urbanization process.

Income inequality: why it matters and why most economists didn't notice

Prevailing economic theory attributes the 2008 crash and the Great Recession that followed to low interest rates, relaxed borrowing standards, and the housing price bubble. After careful analyses of statistical evidence, however, Matthew Drennan discovered that income inequality was the decisive factor behind the crisis. Pressured to keep up consumption in the face of flat or declining incomes, Americans leveraged their home equity to take on excessive debt. The collapse of the housing market left this debt unsupported, causing a domino effect throughout the economy. Drennan also found startling similarities in consumer behavior in the years leading to both the Great Depression and the Great Recession. Offering an economic explanation of a phenomenon described by prominent observers including Thomas Piketty, Jacob Hacker, Robert Kuttner, Paul Krugman, and Joseph Stiglitz, Drennan's evenhanded analysis disproves dominant theories of consumption and draws much-needed attention to the persisting problem of income inequality.

Non-Linearities in the Relationship between House Prices and Interest Rates: Implications for Monetary Policy

Understanding the impact of changes in interest rates on house prices is important for managing house price bubbles and ensuring housing affordability. This paper investigates the effect of interest rates on regional house price to income measures based on a non-linear smooth transition VAR model of inter-regional house price dynamics. To minimize the impact of housing mix changes on estimated effects, we apply the model to an Australian dataset of regional hedonic house price indices that account for both changes in housing mix and quality over time. The empirical analysis provides evidence that house price to income ratios depend non-linearly on interest rates, and moreover that there is an interest rate ‘transition point’ below which a house price bubble is probable. We investigate the implications for monetary policy of stable and unstable house price regimes and propose a housing lending rate lower bound that achieves long-run house price stability in the presence of regime uncertainty. To check the generality of the result, we also apply the model to aggregate Australian and US data.

Measuring House Price Bubbles

Using data for six metropolitan housing markets in three countries, this paper provides a comparison of methods used to measure house price bubbles. We use an asset pricing approach to identify bubble periods retrospectively and then compare those results with results produced by six other methods. We also apply the various methods recursively to assess their ability to identify bubbles as they form. In view of the complexity of the asset pricing approach, we conclude that a simple price-rent ratio measure is a reliable method both ex post and in real time. Our results have important policy implications because a reliable signal that a bubble is forming could be used to avoid further house price increases.

Explosive Behaviour in Australian Housing Markets: Rational Bubbles or Not?

Using recently developed econometric procedures (Phillips, Wu and Yu, 2011; Phillips, Shi and Yu, 2015), we find evidence of temporary episodes of explosive behaviour in price-to-rent ratios for established houses, in five of Australia’s largest cities. One interpretation of our results is that stochastic, rational bubbles were a feature of Australia’s major housing markets; particularly during the early to mid-2000s. However, further analysis of each city’s price-to-rent ratio indicates a very different pattern of behaviour in Sydney and Perth to that experienced in Brisbane, Adelaide and Canberra. For the latter three cities, we present evidence suggesting the explosive root tests are likely capturing the effects of a one-time structural break in their respective price-to-rent ratios. In any event, based on the estimated timing of the explosive episodes in Australia’s housing markets, there is little evidence that what might be identified as house price bubbles had any important negative consequences for the wider economy. Despite the ability of the econometric procedures to provide a real-time signal of explosive behaviour, results from Australian housing markets, suggest policymakers need to be cautious in responding too aggressively to a positive signal from the tests.

Countercyclical capital regime revisited: Tests of robustness

Financial entities have been subject to risk-based capital requirements for many years. The experiences of the recent financial crisis led to heightened criticism that these rules are pro-cyclical, meaning they require insufficient capital during economic booms and excessive capital during busts. In response, recent revisions to such rules have included a countercyclical capital buffer, but it is problematic because implementation is discretionary with respect to both timing and amount on the part of regulators. An alternative rules-based countercyclical capital proposal put forth by Smith and Weiher (April, 2012. Countercyclical capital regime: a proposed design and empirical evaluation. Federal housing finance agency, working paper no. 12-2) that embodies a dynamically adjusting stress test for mortgage assets was intentionally structured to address these concerns.This paper tests the robustness of key elements of the Smith and Weiher (SW) countercyclical capital regime. Specifically, we examine each of the key design elements of the stress test, including construction of the trend line, the trough, and the time-path. We also expand on the empirical results presented by SW by showing how the resulting capital requirements might vary when their countercyclical stress test is applied using several different credit models.These tests of robustness support the conclusion that the SW countercyclical capital regime should produce capital requirements sufficient to ensure an entity would remain solvent during severe house price cycles. This conclusion is strongly supported by a test of concept of the countercyclical framework using Fannie Mae's historical book of business. If the countercyclical capital requirement had been in place during the run-up to the recent house price bubble, Fannie Mae would have been sufficiently capitalized to withstand losses it sustained in the subsequent housing crisis. This result is particularly noteworthy given that key components of the SW stress test were designed based upon pre-2002 data.

Distributional Costs of Housing-price Bubbles: Who pays the Price when Bubbles Deflate?

In considering whether asset-price bubbles should be offset through policy, an important issue is who pays the price when the bubble bursts. A bust that reduces the wealth of well-off households only may have small welfare costs, but costs may be sizable if broad swaths of households are affected. This paper uses micro data on millions of households from the US American Community Survey to examine how the bursting of the 1998–2006 housing bubble affected households’ employment, homeownership, home values, and housing costs. To separate dynamics of the housing bust from those of the aggregate downturn, we differentiate between metropolitan areas that did and did not experience bubbles. We find that, for most measures, deteriorations in well-being were more severe in bubble metros than elsewhere, and for several measures, differential effects on less-educated households were also more severe. This underscores the importance of leaning against broad-based housing bubbles via appropriate policies, as burdens of adjustment fall differentially on people not well prepared to bear them.

International Real Estate Review

In this paper, monthly data from May 2004 to December 2011 are used to calculate the equilibrium housing price predicted by the economic fundamentals of Shenzhen and additional economic fundamentals of Hong Kong under the background of the Shenzhen Hong Kong cross-border integration. Equilibrium housing price is then compared against the actual housing price to test the degree of the Shenzhen housing price bubble during the studied period. We find that aided by the economic fundamentals of Hong Kong, the Shenzhen housing price can be better explained and the gap between the actual and equilibrium housing prices can be largely reduced, thus implying a much smaller Shenzhen housing price bubble.