House Prices, Fundamentals and Bubbles

Abstract

This paper studies actual (real) house prices relative to fundamental (real) house values. Such a focus is warranted since housing constitutes a large fraction of most household portfolios, and its characteristics are such that, in contrast to what prevails in financial markets, arbitrage will be limited and hence correction toward 'true' value is likely to be a prolonged process. Using UK data and a time-varying present value approach, our results preclude the existence of an explosive rational bubble due to non-fundamental factors. We further find that intrinsic bubbles have an important role to play in determining actual house prices although price dynamics appear to impact, particularly in periods of strong deviation from fundamental value. Price dynamics are found to be driven by momentum behaviour. Copyright 2006 The Authors Journal compilation (c) 2006 Blackwell Publishing Ltd.

House Prices and Bubbles in New Zealand

“…Notably, the constant term, which is insignificantly different from zero suggesting that much of the overvaluation is due to price dynamics rather than an overreaction to fundamentals. Interestingly, this result is in contrast those reported in Black et al (2007) and Levin and Wright (1997), who present U.K. evidence at different levels of aggregation and over different time periods suggesting that the relationship between current house prices and the direction of the price path can be a relatively weak one.…”

Testing for persistence in housing price-to-income and price-to-rent ratios in 16 OECD countries

“…They suggest that speculative activity may prolong expansions, ultimately leading to overshooting of house prices. This interpretation is consistent with the fact that expectations of house prices tend to be extrapolative (Cho, 1996;Muellbauer, 2012) and with some evidence of bubbles and momentum trading in housing markets (Black et al, 2006). Sommer et al (2013) shed light on the increase in the US price-torent ratio between 1995 and 2006 by developing a dynamic equilibrium model with endogenous house prices and rents.…”

“…Similarly, Gregoriou et al (2013), using linear and non-linear unit root tests and allowing for structural change, find that UK aggregate and regional house price to earnings ratios are non-stationary over the period 1983Q2-2009Q1. Black et al (2006) find stationarity at the 10% significance level for the aggregate UK price-toincome ratio over the period 1973Q4-2004Q3. Real house prices and real disposable income are cointegrated at the 5% significance level.…”

The international wealth channel: a global error-correcting analysis

“…For example, using US data Lettau and Ludvigson (2001) find a cointegrating vector between consumption, wealth and personal income. Case and Shiller (2003) and Black et al (2006) document cointegrating relationships between housing prices, income, and interest rates. There is some evidence that international stock markets are cointegrated (Kasa 1992), but these results are challenged by Richards (1995).…”