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

Author

Listed:
  • Valerie Grossman
  • Adrienne Mack
  • Enrique Martinez-Garcia
  • Efthymios Pavlidis
  • Ivan Paya
  • David Peel
  • Alisa Yusupova

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

  • Valerie Grossman & Adrienne Mack & Enrique Martinez-Garcia & Efthymios Pavlidis & Ivan Paya & David Peel & Alisa Yusupova, 2013. "Episodes of Exuberance in Housing Markets: In Search of the Smoking Gun," Globalization Institute Working Papers 165, Federal Reserve Bank of Dallas.
  • 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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    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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