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Testing for rational bubbles in the housing market


  • Bjørnar Karlsen Kivedal

    () (Department of Economics, Norwegian University of Science and Technology)


This paper investigates the presence of a bubble in the US housing market prior to the 2007 subprime mortgage financial crisis. The relationship between housing prices and rental prices, known as the price-rent ratio, is an important measure of a potential deviation between housing prices and its fundamental value. Additionally, the interest rate is taken into account since it is an important factor in determining demand for housing mortgages and thereby influence housing prices. These relationships are then put into a theoretical model framework. The empirical evidence suggests that there was a bubble in the housing market prior to the financial crisis, even when controlling for the decreasing interest rate in the period. Hence, the econometric procedures used in the analysis may be relevant for monitoring the housing market.

Suggested Citation

  • Bjørnar Karlsen Kivedal, 2012. "Testing for rational bubbles in the housing market," Working Paper Series 13312, Department of Economics, Norwegian University of Science and Technology.
  • Handle: RePEc:nst:samfok:13312

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    References listed on IDEAS

    1. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
    2. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
    3. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    4. Morris A. Davis & Andreas Lehnert & Robert F. Martin, 2008. "The Rent-Price Ratio For The Aggregate Stock Of Owner-Occupied Housing," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 54(2), pages 279-284, June.
    5. Stiglitz, Joseph E, 1990. "Symposium on Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 13-18, Spring.
    6. Engsted, Tom, 2006. "Explosive bubbles in the cointegrated VAR model," Finance Research Letters, Elsevier, vol. 3(2), pages 154-162, June.
    7. Flood, Robert P & Hodrick, Robert J, 1990. "On Testing for Speculative Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 85-101, Spring.
    8. Nielsen, Bent, 2010. "Analysis Of Coexplosive Processes," Econometric Theory, Cambridge University Press, vol. 26(03), pages 882-915, June.
    9. Poterba, James M, 1992. "Taxation and Housing: Old Questions, New Answers," American Economic Review, American Economic Association, vol. 82(2), pages 237-242, May.
    10. Juselius, Katarina, 2006. "The Cointegrated VAR Model: Methodology and Applications," OUP Catalogue, Oxford University Press, number 9780199285679, June.
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    Cited by:

    1. Marcelo M. de Oliveira & Alexandre C. L. Almeida, 2014. "Testing for rational speculative bubbles in the Brazilian residential real-estate market," Papers 1401.7615,

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