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Episodes of exuberance in housing markets

Author

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

Abstract

After a prolonged period characterized by rapid real appreciation in house prices, there is now broad recognition of the severe correction in housing markets that followed as one of the causes of the 2008-09 global recession. We investigate the time series characteristics of three relevant price indicators of the housing market --real house prices, price-to-income, and price-to-rent ratios-- for the U.S. and 21 other countries during the period 1975Q1-2013Q2 (see Mack and Martínez-García (2011)) for evidence of explosive behavior as a plausible explanation for the boom and bust. The empirical detection of explosive behavior in house prices provides a precise timeline as well as empirical content to the narrative connecting the evolution of housing markets to the global recession; our rich cross-country dataset offers a novel international perspective. For testing and detection, we adopt a pair of novel techniques based on a right-tail variation of the standard Augmented Dickey-Fuller (ADF) test --the supremum ADF (SADF) (Phillips et al. (2011)) and the generalized SADF (GSADF) (Phillips et al. (2012) and Phillips et al. (2013))-- where the alternative hypothesis is of a mildly explosive process (even periodically collapsing with the GSADF test) behavior within sample. Statistically significant periods of exuberance are found in most countries, with our empirical estimates suggesting an unprecedented synchronization across countries preceding the global recession. The boom in housing begins during the late 90s in the U.S. spreading to most countries by the early 2000s, until it bursts for most during 2007-08 as the impact on economic activity was being felt. In this regard, our findings corroborate the narrative of the 2008-09 global recession. In this paper, we also discuss more generally the use of these procedures to monitor international housing markets and as a warning signal.

Suggested Citation

  • Efthymios Pavlidis & Alisa Yusupova & Ivan Paya & David Peel & Enrique Martinez-Garcia & Adrienne Mack & Valerie Crossman, 2014. "Episodes of exuberance in housing markets," Working Papers 64908732, Lancaster University Management School, Economics Department.
  • Handle: RePEc:lan:wpaper:64908732
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    References listed on IDEAS

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    Cited by:

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    2. 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.
    3. Engsted, Tom & Hviid, Simon J. & Pedersen, Thomas Q., 2016. "Explosive bubbles in house prices? Evidence from the OECD countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 40(C), pages 14-25.
    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. Tsangyao Chang & Luis Gil-Alana & Goodness C. Aye & Rangan Gupta & Omid Ranjbar, 2016. "Testing for bubbles in the BRICS stock markets," Journal of Economic Studies, Emerald Group Publishing, vol. 43(4), pages 646-660, September.
    6. Kennedy, Gerard & O'Brien, Eoin & Woods, Maria, 2016. "Assessing the sustainability of Irish residential property prices: 1980Q1-2016Q2," Economic Letters 11/EL/16, Central Bank of Ireland.
    7. Rafiq Ahmed & Syed Tehseen Jawaid & Samina Khalil, 2021. "Bubble Detection in Housing Market: Evidence From a Developing Country," SAGE Open, , vol. 11(2), pages 21582440211, April.
    8. Philip Inyeob Ji & Glenn Otto, 2015. "Explosive Behaviour in Australian Housing Markets: Rational Bubbles or Not?," Discussion Papers 2015-27, School of Economics, The University of New South Wales.
    9. Sara Ferreira Filipe, 2018. "Housing prices and mortgage credit in Luxembourg," BCL working papers 117, Central Bank of Luxembourg.
    10. Efthymios Pavlidis & Ivan Paya & Alexandros Skouralis, 2021. "House prices, (un)affordability and systemic risk," New Zealand Economic Papers, Taylor & Francis Journals, vol. 55(1), pages 105-123, January.
    11. Virtanen, Timo & Tölö, Eero & Virén, Matti & Taipalus, Katja, 2018. "Can bubble theory foresee banking crises?," Journal of Financial Stability, Elsevier, vol. 36(C), pages 66-81.
    12. Robert N. Killins, 2020. "Real estate prices and banking performance: evidence from Canada," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(1), pages 78-98, January.
    13. Jose E. Gomez-Gonzalez & Jair N. Ojeda-Joya & Juan P. Franco & Jhon E. Torres, 2017. "Asset Price Bubbles: Existence, Persistence and Migration," South African Journal of Economics, Economic Society of South Africa, vol. 85(1), pages 52-67, March.
    14. 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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