Testing for Bubbles in Housing Markets: A Panel Data Approach
AbstractWe employ recently developed cross-sectionally robust panel data tests for unit roots and cointegration to find whether house prices reflect house-related earnings. We use U.S. data for Metropolitan Statistical Areas, with house price measured by the weighted-repeated-sales index, and cash flows either by market tenant rents or estimates of a fair market rent. In our full sample periods, an error-correction model is not appropriate, i.e. there is a bubble. We then combine overlapping ten-year periods, price-rent ratios, and the panel data tests to construct a bubble indicator. The indicator is high for the late 1980s, early 1990s and since the late 1990s for both panels. Finally, evidence based on panel data Granger causality tests suggests that house price changes are helpful in predicting changes in rents and vice versa.
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Bibliographic InfoPaper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp338.
Date of creation: Oct 2007
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Cointegration; panel data; unit root; bubble; house prices; rents.;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
- R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-11-10 (All new papers)
- NEP-CFN-2007-11-10 (Corporate Finance)
- NEP-GEO-2007-11-10 (Economic Geography)
- NEP-URE-2007-11-10 (Urban & Real Estate Economics)
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