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Testing for Bubbles in Housing Markets: A Panel Data Approach

  • Vyacheslav Mikhed
  • Petr Zemčík

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    We 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 by market tenants’ rents. In our full sample period, an error-correction model is not appropriate, i.e. there is a bubble. We then combine overlapping 10-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. Finally, evidence based on panel data Granger causality tests suggests that house price changes are helpful in predicting changes in rents and vice versa. Copyright Springer Science+Business Media, LLC 2009

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    File URL: http://hdl.handle.net/10.1007/s11146-007-9090-2
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    Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

    Volume (Year): 38 (2009)
    Issue (Month): 4 (May)
    Pages: 366-386

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    Handle: RePEc:kap:jrefec:v:38:y:2009:i:4:p:366-386
    DOI: 10.1007/s11146-007-9090-2
    Contact details of provider: Web page: http://www.springer.com

    Order Information: Web: http://www.springer.com/economics/regional+science/journal/11146/PS2

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    1. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
    2. Clark, Todd E., 1995. "Rents and prices of housing across areas of the United States. A cross-section examination of the present value model," Regional Science and Urban Economics, Elsevier, vol. 25(2), pages 237-247, April.
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    4. Campbell, John & Shiller, Robert, 1987. "Cointegration and Tests of Present Value Models," Scholarly Articles 3122490, Harvard University Department of Economics.
    5. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
    6. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    7. Malpezzi, Stephen, 1999. "A Simple Error Correction Model of House Prices," Journal of Housing Economics, Elsevier, vol. 8(1), pages 27-62, March.
    8. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
    9. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
    10. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(03), pages 597-625, June.
    11. M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
    12. Capozza, Dennis R. & Seguin, Paul J., 1996. "Expectations, efficiency, and euphoria in the housing market," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 369-386, June.
    13. Wang, Peijie, 2000. "Market Efficiency and Rationality in Property Investment," The Journal of Real Estate Finance and Economics, Springer, vol. 21(2), pages 185-201, September.
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    15. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-37, March.
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