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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.

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File URL: http://www.svt.ntnu.no/iso/WP/2012/10_housingbubbles_BKK.pdf
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Paper provided by Department of Economics, Norwegian University of Science and Technology in its series Working Paper Series with number 13312.

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Length: 18 pages
Date of creation: 17 Aug 2012
Date of revision:
Handle: RePEc:nst:samfok:13312
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Web page: http://www.svt.ntnu.no/iso/WP/wp.htm
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  1. Juselius, Katarina, 2006. "The Cointegrated VAR Model: Methodology and Applications," OUP Catalogue, Oxford University Press, number 9780199285679, March.
  2. Morris A. Davis & Andreas Lehnert & Robert F. Martin, 2005. "The Rent-Price Ratio for the Aggregate Stock of Owner-Occupied Housing," Urban/Regional 0509019, EconWPA.
  3. 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.
  4. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  5. Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
  6. Poterba, James M, 1992. "Taxation and Housing: Old Questions, New Answers," American Economic Review, American Economic Association, vol. 82(2), pages 237-42, May.
  7. Bent Nielsen, 2005. "Analysis of co-explosive processes," Economics Series Working Papers 2005-W08, University of Oxford, Department of Economics.
  8. Stiglitz, Joseph E, 1990. "Symposium on Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 13-18, Spring.
  9. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions," NBER Working Papers 11643, National Bureau of Economic Research, Inc.
  10. Engsted, Tom, 2006. "Explosive bubbles in the cointegrated VAR model," Finance Research Letters, Elsevier, vol. 3(2), pages 154-162, June.
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