No-Bubble Condition: Model-Free Tests in Housing Markets

Stefano Giglio, Ströbel, Johannes and Matteo Maggiori
Authors registered in the RePEc Author Service: Johannes Stroebel

No 9978, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We test for the existence of housing bubbles associated with a failure of the transversality condition that requires the present value of payments occurring infinitely far in the future to be zero. The most prominent such bubble is the classic rational bubble. We study housing markets in the U.K. and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are finitematurity, pre-paid, and tradable ownership contracts with maturities often exceeding 700 years. Freeholds are infinite-maturity ownership contracts. The price difference between leaseholds with extremely-long maturities and freeholds reflects the present value of a claim to the freehold after leasehold expiry, and is thus a direct empirical measure of the transversality condition. We estimate this price difference, and find no evidence for failures of the transversality condition in housing markets in the U.K. and Singapore, even during periods when a sizeable bubble was regularly thought to be present.

Keywords: Rational bubbles; Financial crisis; House prices; Real estate; Asset pricing (search for similar items in EconPapers)
JEL-codes: E44 G02 G12 G14 R30 (search for similar items in EconPapers)
Date: 2014-05
New Economics Papers: this item is included in nep-env, nep-sea and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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Related works:
Journal Article: No‐Bubble Condition: Model‐Free Tests in Housing Markets (2016)
Working Paper: No-Bubble Condition: Model-free Tests in Housing Markets (2014)
Working Paper: No-Bubble Condition: Model-Free Tests in Housing Markets
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