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How to identify housing bubbles? A decision support model

Author

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  • Charalambos Pitros
  • Yusuf Arayici

Abstract

Purpose - The purpose of this paper is to provide a decision support model for the early diagnosis of housing bubbles in the UK during the maturity process of the phenomenon. Design/methodology/approach - The development process of the model is divided into four stages. These stages are driven by the normal distribution theorem coupled with the case study approach. The application of normal distribution theory is allowed through the usage of several parametric tools. The case studies tested in this research include the last two UK housing bubbles, 1986 to 1989 and 2001/2002 to 2007. The central hypothesis of the model is that during housing bubbles, all speculative activities of market participants follow an approximate synchronisation, and therefore, an irrational, synchronous and periodic increase on a wide range of relevant variables must occur to anticipate the bubble component. An empirical application of the model is conducted on UK housing market data over the period of 1983-2011. Findings - The new approach successfully identifies the well-known UK historical bubble episodes over the period of 1983-2011. The study further determines that for uncovering housing bubbles in the UK, house price changes have the same weight with the debt–burden ratio when their velocity is positive. Finally, the application of this model has led us to conclude that the model’s outputs fluctuate approximately in line with phases of the UK real estate cycle. Originality/value - This paper proposes a new measure for studying the presence of housing bubbles. This measure is not simply an ex post detection technique but dating algorithms that use data only up to the point of analysis for an on-going bubble assessment, giving an early warning diagnostic that can assist market participants and regulators in market monitoring.

Suggested Citation

  • Charalambos Pitros & Yusuf Arayici, 2016. "How to identify housing bubbles? A decision support model," International Journal of Housing Markets and Analysis, Emerald Group Publishing Limited, vol. 9(2), pages 190-221, June.
    • Handle: RePEc:eme:ijhmap:v:9:y:2016:i:2:p:190-221
    DOI: 10.1108/IJHMA-01-2015-0002
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    Citations

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    Cited by:

    1. Francesco Tajani & Pierluigi Morano & Maria Paz Saez-Perez & Felicia Di Liddo & Marco Locurcio, 2019. "Multivariate Dynamic Analysis and Forecasting Models of Future Property Bubbles: Empirical Applications to the Housing Markets of Spanish Metropolitan Cities," Sustainability, MDPI, vol. 11(13), pages 1-21, June.
    2. Coskun Yener & Jadevicius Arvydas, 2017. "Is there a Housing Bubble in Turkey?," Real Estate Management and Valuation, Sciendo, vol. 25(1), pages 48-73, March.

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