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Estimating bubbles and affordable housing price trends: A study based on Singapore

Tilak Abeysinghe () and Jiaying Gu ()
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Jiaying Gu: Department of Economics, University of Illinois at Urbana-Champaign

SCAPE Policy Research Working Paper Series from National University of Singapore, Department of Economics, SCAPE

Abstract: Policy makers often impose some cooling measures on the housing market when housing prices rise fast. Such policies yield limited success if housing prices are driven up by fundamentals. A fundamental price trend may not necessarily be an affordable one. Unaffordable housing price trends increase the mortgage burden of households. Estimating these different price trends provides valuable information to policy makers. This paper presents an empirical methodology to separate out a housing price trend into fundamental and affordable components. The gap between actual and fundamental trend is attributed to expectations driven persistence of housing price inflation. This is the component that cooling measures are usually aimed at. Affordable housing price trend is defined in terms of a measure of lifetime income. Affordability requires the house price to lifetime income ratio to be stationary with a certain mean. Fundamentals need to be adjusted to obtain this outcome. Analyzing Singapore data using this methodology reveals some interesting observations.

Keywords: Fundamental housing price; affordable housing price; lifetime income; counter-factual simulations (search for similar items in EconPapers)
JEL-codes: R21 D31 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2013-02
New Economics Papers: this item is included in nep-cwa and nep-ure
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Handle: RePEc:sca:scaewp:1301