Episodes of Exuberance in Housing Markets: In Search of the Smoking Gun

Abstract

In this paper, we examine changes in the time series properties of standard housing market indicators (real house prices, price-to-income ratios, and price-to-rent ratios) for a large set of countries to detect episodes of explosive dynamics. Dating exuberance in housing markets provides a timeline as well as empirical content to the narrative connecting housing exuberance to the global 2008-09 recession. For our investigation, we employ two recursive univariate unit root tests developed by Phillips et al. (2011) and Phillips et al. (2015). We also propose a novel extension of the Phillips et al. (2015) test to a panel setting in order to exploit the large cross-sectional dimension of our international dataset. Statistically significant periods of exuberance are found in most countries. Moreover, there is also strong evidence of an unprecedented period of exuberance in the early 2000s that eventually collapsed around 2006-07, preceding the 2008-09 global recession. We find that long-term interest rates, credit growth and global economic conditions help to predict (in-sample) episodes of housing exuberance. We conclude that global macro and financial factors explain (partly) the synchronization of exuberance episodes that we detect in the data in the 2000s.