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Episodes of Exuberance in Housing Markets: In Search of the Smoking Gun

Author

Listed:
  • Pavlidis, Efthymios

    (Lancaster University)

  • Yusupova, Alisa

    (Lancaster University)

  • Paya, Ivan

    (Lancaster University)

  • Peel, David

    (Lancaster University)

  • Martinez-Garcia, Enrique

    () (Federal Reserve Bank of Dallas)

  • Mack, Adrienne

    (Mutual of Omaha)

  • Grossman, Valerie

    (Federal Reserve Bank of Dallas)

Abstract

In this paper, we examine changes in the time series properties of standard housing market indicators (real house prices, price-to-income ratios, and price-to-rent ratios) for a large set of countries to detect episodes of explosive dynamics. Dating exuberance in housing markets provides a timeline as well as empirical content to the narrative connecting housing exuberance to the global 2008―09 recession. For our investigation, we employ two recursive univariate unit root tests developed by Phillips et al. (2011) and Phillips et al. (2015). We also propose a novel extension of the Phillips et al. (2015) test to a panel setting in order to exploit the large cross-sectional dimension of our international dataset. Statistically significant periods of exuberance are found in most countries. Moreover, there is also strong evidence of an unprecedented period of exuberance in the early 2000s that eventually collapsed around 2006―07, preceding the 2008―09 global recession. We find that long-term interest rates, credit growth and global economic conditions help to predict (in-sample) episodes of housing exuberance. We conclude that global macro and financial factors explain (partly) the synchronization of exuberance episodes that we detect in the data in the 2000s.

Suggested Citation

  • Pavlidis, Efthymios & Yusupova, Alisa & Paya, Ivan & Peel, David & Martinez-Garcia, Enrique & Mack, Adrienne & Grossman, Valerie, 2013. "Episodes of Exuberance in Housing Markets: In Search of the Smoking Gun," Globalization Institute Working Papers 165, Federal Reserve Bank of Dallas, revised 01 Jun 2015.
  • Handle: RePEc:fip:feddgw:165
    Note: Published as: Pavlidis, Efthymios, Alisa Yusupova, Ivan Paya, David Peel, Enrique Martínez-García, Adrienne Mack and Valerie Grossman (2016), "Episodes of Exuberance in Housing Markets: In Search of the Smoking Gun," The Journal of Real Estate Finance and Economics 53 (4): 419-449. An earlier draft of the working paper circulated as "Monitoring Housing Markets for Periods of Exuberance. An Application of the Phillips et al. (2012, 2013) GSADF Test on the Dallas Fed International House Price Database."
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    Cited by:

    1. Ghassen El Montasser & Rangan Gupta & Charl Jooste & Stephen M. Miller, 2015. "The Time-Series Linkages between US Fiscal Policy and Asset Prices," Working Papers 201519, University of Pretoria, Department of Economics.
    2. repec:kap:jrefec:v:56:y:2018:i:4:d:10.1007_s11146-017-9605-4 is not listed on IDEAS
    3. Peter C. B. Phillips, 2017. "Detecting Financial Collapse and Ballooning Sovereign Risk," Cowles Foundation Discussion Papers 3010, Cowles Foundation for Research in Economics, Yale University.
    4. André K. Anundsen & Karsten Gerdrup & Frank Hansen & Kasper Kragh‐Sørensen, 2016. "Bubbles and Crises: The Role of House Prices and Credit," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(7), pages 1291-1311, November.
    5. repec:eee:ememar:v:33:y:2017:i:c:p:90-101 is not listed on IDEAS
    6. Efthymios Pavlidis & Ivan Paya & David Alan Peel & Alisa Yevgenyevna Yusupova, 2017. "Exuberance in the U.K. Regional Housing Markets," Working Papers 168117137, Lancaster University Management School, Economics Department.
    7. Escobari, Diego & Garcia, Sergio & Mellado, Cristhian, 2017. "Identifying bubbles in Latin American equity markets: Phillips-Perron-based tests and linkages," Emerging Markets Review, Elsevier, vol. 33(C), pages 90-101.
    8. repec:eee:ecmode:v:68:y:2018:i:c:p:388-408 is not listed on IDEAS
    9. Pavlidis, Efthymios & Martinez-Garcia, Enrique & Grossman, Valerie, 2017. "Detecting Periods of Exuberance: A Look at the Role of Aggregation with an Application to House Prices," Globalization and Monetary Policy Institute Working Paper 325, Federal Reserve Bank of Dallas, revised 01 Jul 2018.
    10. Jose Eduardo Gomez-Gonzalez & Juliana Gamboa-Arbeláez & Jorge Hirs-Garzón & Andrés Pinchao-Rosero, 2018. "When Bubble Meets Bubble: Contagion in OECD Countries," The Journal of Real Estate Finance and Economics, Springer, vol. 56(4), pages 546-566, May.
    11. Steenkamp, Daan, 2018. "Explosiveness in G11 currencies," Economic Modelling, Elsevier, vol. 68(C), pages 388-408.
    12. Benjamin Beckers, 2015. "The Real-Time Predictive Content of Asset Price Bubbles for Macro Forecasts," Discussion Papers of DIW Berlin 1496, DIW Berlin, German Institute for Economic Research.
    13. Itamar Caspi, 2016. "Testing for a housing bubble at the national and regional level: the case of Israel," Empirical Economics, Springer, vol. 51(2), pages 483-516, September.
    14. Ryan van Lamoen & Simona Mattheussens & Martijn Dröes, 2017. "Quantitative easing and exuberance in government bond markets: Evidence from the ECB's expanded asset purchase program," DNB Working Papers 548, Netherlands Central Bank, Research Department.
    15. repec:eee:finsta:v:36:y:2018:i:c:p:66-81 is not listed on IDEAS
    16. Petre Caraiani & Adrian Cantemir Călin & Rangan Gupta, 2018. "Monetary Policy and Bubbles in US REITs," Working Papers 201845, University of Pretoria, Department of Economics.
    17. Daan Steenkamp, 2017. "How bubbly is the New Zealand dollar?," Reserve Bank of New Zealand Discussion Paper Series DP2017/03, Reserve Bank of New Zealand.
    18. repec:eee:ecmode:v:66:y:2017:i:c:p:101-111 is not listed on IDEAS
    19. McQuinn, Kieran, 2014. "Bubble, Bubble Toil and Trouble? An Assessment of the Current State of the Irish Housing Market," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI).
    20. ZEREN, Feyyaz & ERGÜZEL, Oylum Şehvez, 2015. "Testing For Bubbles In The Housing Market: Further Evidence From Turkey," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 19(1), pages 40-52.
    21. J. Sebastian Amador-Torres & Jose Eduardo Gomez-Gonzalez & Sebastian Sanin-Restrepo, 2017. "I know what you did during the last bubble: Determinants of housing bubbles' duration in OECD countries," Borradores de Economia 1005, Banco de la Republica de Colombia.
    22. Peter C. B. Phillips, 2017. "Detecting Financial Collapse and Ballooning Sovereign Risk," Cowles Foundation Discussion Papers 2110, Cowles Foundation for Research in Economics, Yale University.
    23. Martijn (M.I.) Droes & Ryan van Lamoen & Simona Mattheussens, 2017. "Quantitative Easing and Exuberance in Government Bond Markets: Evidence from the ECB's Expanded Assets Purchase Program," Tinbergen Institute Discussion Papers 17-080/IV, Tinbergen Institute.

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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