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Identification of house price bubbles using user cost in a state space model

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  • Hanxiong Zhang
  • Robert Hudson
  • Hugh Metcalf
  • Viktor Manahov

Abstract

This article studies how much variation in house prices results from nonfundamental factors . We propose a relative valuation approach to quantifying a bubble in housing by incorporating the housing User Cost into a state space model. We find that UK house prices were undervalued from January 1995 to May 2001 and subsequently moved into a bubble over the period to October 2012. Our results support the bounded rationality hypothesis in the long run. However, we also find that the irrational and the rational expectation hypotheses can coexist in the short run when explosive bubbles are driven by price dynamics .

Suggested Citation

  • Hanxiong Zhang & Robert Hudson & Hugh Metcalf & Viktor Manahov, 2015. "Identification of house price bubbles using user cost in a state space model," Applied Economics, Taylor & Francis Journals, vol. 47(56), pages 6088-6101, December.
    • Handle: RePEc:taf:applec:v:47:y:2015:i:56:p:6088-6101
    DOI: 10.1080/00036846.2015.1064078
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    References listed on IDEAS

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    1. Andrea Finicelli, 2007. "House price developments and fundamentals in the United States," Questioni di Economia e Finanza (Occasional Papers) 7, Bank of Italy, Economic Research and International Relations Area.
    2. George A. Akerlof & Robert J. Shiller, 2010. "Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism," Economics Books, Princeton University Press, edition 1, number 9163.
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    Cited by:

    1. Hettihewa, Samanthala & Saha, Shrabani & Zhang, Hanxiong, 2018. "Does an aging population influence stock markets? Evidence from New Zealand," Economic Modelling, Elsevier, vol. 75(C), pages 142-158.

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