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Rational Bubbles in UK Housing Markets: Comment on “No‐Bubble Condition: Model‐Free Tests in Housing Markets”

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  • David Domeij
  • Tore Ellingsen

Abstract

Giglio, Maggiori, and Stroebel (2016) show that there is no significant price difference between freeholds and ultra‐long leaseholds in the UK housing market. They claim that this finding precludes the presence of large rational bubbles, as these can only attach to the price of freeholds. But the conclusion presumes that leaseholders cannot acquire bubbles through enfranchisement at favorable prices. We find that the presumption is violated. Enfranchisement rights are comprehensive and cheap to exercise. We also dispute the counter‐argument that cheap enfranchisement proves that market participants, if they have rational expectations, must have explicitly concluded that freehold prices are bubbleless.

Suggested Citation

  • David Domeij & Tore Ellingsen, 2020. "Rational Bubbles in UK Housing Markets: Comment on “No‐Bubble Condition: Model‐Free Tests in Housing Markets”," Econometrica, Econometric Society, vol. 88(4), pages 1755-1766, July.
    • Handle: RePEc:wly:emetrp:v:88:y:2020:i:4:p:1755-1766
    DOI: 10.3982/ECTA16447
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