Most previous studies have reported that housing prices diffuse from the city centre to surrounding areas. However, these studies have overlooked the fact that housing prices comprise fundamental and bubble prices. We investigated whether bubble prices also diffuse from the city centre to suburbs and whether fundamental or bubble prices promote housing price diffusion. We focused on the movement of housing bubbles from the city centre to the suburbs. Using data for the Taipei metropolitan area from 1973 to 2014 for empirical analysis, our state-space model estimates statistically significant fundamental and bubble prices in Taipei City (city centre) and New Taipei City (suburbs). Engle–Granger cointegration test results reveal that the housing and bubble prices of the two cities are cointegrated; however, fundamental prices are not. F statistics reveal that the Granger causality of bubble prices (the central city Granger causing changes in the suburbs) is more significant and powerful than that of the fundamental prices. Therefore, we demonstrate that housing bubbles force housing price diffusion. In addition, when bubble prices spread from the city centre to the suburbs, the housing bubble in the suburbs is larger than that in the city centre, implying that the suburbs have greater potential for a bubble burst crisis called the bubble contagion. Authorities should pay more attention to the bubble contagion and must address the problem of high housing prices in the suburbs to prevent this bubble from bursting

This study examines the impact of land tenure on housing bubbles. A housing bubble is defined as the portion of housing prices not justified by market fundamentals that determine the consumption demand for housing. While there are many factors that contribute to the formation of housing bubbles, we hypothesize that a housing bubble is likely to be bigger in a market with freehold properties than in one with leasehold properties. This is because the value of the real redevelopment option embedded in a freehold property is affected by changes market expectations to a much greater extent than its use value. Therefore a small change in market sentiment will affect the prices of housing units situated on freehold land more than those on leasehold land. We use a state-space model to empirically estimate the sizes of housing bubbles in Taipei and Hong Kong since the 1980s. The land tenure in the former is freehold, while that in the latter is leasehold. We find that the average size of housing bubbles is larger in Taipei during the period of observation, which supports our hypothesis. The change in Hong Kong's land policy after July 1997 has effectively turned its land tenure system from one of leasehold to "almost freehold" (i.e., the market expects that leasehold land will be automatically be renewed without payment of a premium upon the expiry of a lease). Our result shows that there has been an increase in the magnitude of housing bubbles in Hong Kong since 1997, which provides further empirical support to our hypothesis. The results also have important policy implications for developing markets where the land tenure systems are still evolving.

This study examines the impact of land tenure on housing bubbles. A housing bubble is defined as the portion of housing prices not justified by market fundamentals that determine the consumption demand for housing. While there are many factors that contribute to the formation of housing bubbles, we hypothesize that a housing bubble is likely to be bigger in a market with freehold properties than in one with leasehold properties. This is because the value of the real redevelopment option embedded in a freehold property is affected by changes market expectations to a much greater extent than its use value. Therefore a small change in market sentiment will affect the prices of housing units situated on freehold land more than those on leasehold land. We use a state-space model to empirically estimate the sizes of housing bubbles in Taipei and Hong Kong since the 1980s. The land tenure in the former is freehold, while that in the latter is leasehold. We find that the average size of housing bubbles is larger in Taipei during the period of observation, which supports our hypothesis. The change in Hong Kong's land policy after July 1997 has effectively turned its land tenure system from one of leasehold to "almost freehold" (i.e., the market expects that leasehold land will be automatically be renewed without payment of a premium upon the expiry of a lease). Our result shows that there has been an increase in the magnitude of housing bubbles in Hong Kong since 1997, which provides further empirical support to our hypothesis. The results also have important policy implications for developing markets where the land tenure systems are still evolving.

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