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Testing for rational bubbles in the housing market

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  • Bjørnar Karlsen Kivedal

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

Abstract

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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    File URL: http://www.svt.ntnu.no/iso/WP/2012/10_housingbubbles_BKK.pdf
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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