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A global house price bubble? Evaluation based on a new rent-price approach

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  • Taipalus , Katja

    ()
    (Bank of Finland Research)

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    Abstract

    The dividend yield ratio in the stock markets is, to an extent, comparable to the rent-price ratio in the housing market. Taking advantage of this definitional similarity, one can then use the traditional unit root test for log dividend yield – in this case, the log rent-price ratio – to test for the existence of real estate bubbles. Such unit root tests are conducted for Finland, USA, UK, Spain and Germany, and the simple test results strongly suggest the existence of bubbles in nearly all of these countries. In addition to this, we develop a continuous and monthly rent-price information-based method to track the periods when real estate prices diverge from their fundamental levels. This indicator seems to work quite well in most cases, indicating bubbles during periods which, according to the consensus literature, are seen as periods of sizable upward or downward shifts in house prices.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0629netti.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 29/2006.

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    Length: 68 pages
    Date of creation: 23 Nov 2006
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2006_029

    Contact details of provider:
    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
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    Keywords: house price; bubble; unit root;

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    1. Arcelus, Francisco & Meltzer, Allan H, 1973. "The Markets for Housing and Housing Services," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 78-99, Part I Fe.
    2. Banerjee, Anindya & Lumsdaine, Robin L & Stock, James H, 1992. "Recursive and Sequential Tests of the Unit-Root and Trend-Break Hypotheses: Theory and International Evidence," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 271-87, July.
    3. Alchian, Armen A & Klein, Benjamin, 1973. "On a Correct Measure of Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 173-91, Part I Fe.
    4. Charles R. Bean, 2004. "Asset Prices, Financial Instability, and Monetary Policy," American Economic Review, American Economic Association, vol. 94(2), pages 14-18, May.
    5. Arcelus, Francisco & Meltzer, Allan H, 1973. "The Markets for Housing and Housing Services: Reply," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(4), pages 973-78, November.
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    Cited by:
    1. Bellod Redondo, José Francisco, 2009. "El precio de la vivienda y la inflación en España," El Trimestre Económico, Fondo de Cultura Económica, vol. 0(302), pages 379-405, abril-jun.

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