Identification of house price bubbles using user cost in a state space model

Abstract

This paper studies how much variation in house prices results from non-fundamental factors. We propose a relative valuation approach to quantifying a bubble in housing by incorporating the housing User Cost into a State-Space model. We find UK house prices were under-valued from January 1995 to May 2001 and subsequently moved into a bubble over the period to October 2012. Our results support the bounded rationality hypothesis in the long-run. However, we also find that the irrational and the rational expectation hypotheses can coexist in the short-run when explosive bubbles are driven by price dynamics. JEL Classification: C51; G02; G12.2

Does an aging population influence stock markets? Evidence from New Zealand

“…The finding of no evidence of baby boomers demography influencing stock market prices is consistent with Poterba (2001) and stand in contrast to the channels displayed in LCH as well as general equilibrium models for stock markets. The results reveal that the short-run volatility might be explained, in part, by irrational behavior on the part of investors (Shiller, 1990;Zhang et al, 2015) and other factors. One way to construe the findings would be that, even when changing demography affects the stock market, the power and the speed of the changes are so small that they are washed out by other effects.…”

Are there irrational bubbles under the high residential housing prices in China’s major cities?

“…Since the equilibrium value could hardly be observed, researchers build up models to explore the most fundamentals, which determine what "fundamental" is. Different types of models are used to capture the equilibrium prices of houses, such as the housing pricing model (Arestis and Elias Karakitsos 2010), the hedonic house price model (Jason Beck, Joshua Fralick, and Michael Toma 2012), and the state space model (Hanxiong Zhang et al 2015). After determining the fundamental values of houses, econometric tests are applied to detect house price bubbles.…”