How to identify housing bubbles? A Decision Support Model

Charalambos Pitros and Yusuf Arayici

ERES from European Real Estate Society (ERES)

Abstract: Purpose - The purpose of this paper is to provide a decision support model for the early diagnosis of housing bubbles in the UK during the maturity process of the phenomenon.Design/methodology/approach - The study adopts a positivist approach utilising several parametric statistical tools to support the usefulness of normal distribution theorem to bubble detection. The strategy of this study involves case study analysis by relying on the UK housing bubble periods of _1986-1989 and 2001/2-2007. The research process for the model development is divided into four stages. The first stage includes the identification and verification of the selected variables. The second focuses on the key constructs of the model. The third stage identifies the model's diagnostic rule and proposes the model. The fourth stage includes the tests of the model through the implementation of the case studies.Findings - The findings of the model reveal that the period of 1986-1989 and the period of 2001-2006 were bubble periods for the UK housing market at a 95% confidence interval. At 90% confidence the model reveal that the UK housing market was in a bubble for the periods between 1986-1989 and 2001-2007. The study further founds that for uncovering housing bubbles in the UK house price changes have the same weight with the debt-burden ratio when their velocity is positive. The application of this model has led us to conclude that the modelÕs outputs are fluctuated in line with the phases of the UK real estate cycle.Originality/value - This paper is amongst the few studies that propose a model for identifying housing bubbles in the UK and the first to be based purely on the acceleration rate of the model input. This is also the first study that attempts to hierarchize each variable on the basis of which variables accounts better the presence of housing bubbles. This paper will help researchers and professionals (i.e. appraisers) to better understand the 'risk' associated with the presence of bubbles in the UK housing market.

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2015-07-01
New Economics Papers: this item is included in nep-ure
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