Diagnosing Housing Bubbles across Rich Countries

Akhter Faroque and Stanley A. Koren

International Journal of Economics and Finance, 2018, vol. 10, issue 4, 179-190

Abstract: This paper addresses an empirical puzzle in the housing bubble literature: models of market fundamentals perform poorly in explaining investor exuberance in housing even though, individually, many fundamentals have strong ability to predict explosive growth in real house prices. We explore two plausible sources for the poor performance: missing fundamentals and missing bubble dynamics. To shed light on the relative importance of these sources, we conduct a detailed two-step investigation of the housing markets in ten rich countries using models, methodologies and datasets that are similar to those employed in the existing literature. Our findings consistently show that the predictive ability of models of market fundamentals can be dramatically enhanced once missing dynamics of housing bubbles are properly accounted for. GSADF denotes Generalised Sup Augmented Dickey¨CFuller test and SADF denotes Sup Augmented Dickey¨CFuller test.

Keywords: housing bubble dynamics; GSADF test; dynamic probit models (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:ibn:ijefaa:v:10:y:2018:i:4:p:179-190

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