Housing bubble contagion from city centre to suburbs

Abstract

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

When Bubble Meets Bubble: Contagion in OECD Countries

“…Some empirical papers have tested this hypothesis, using data for cities in a particular country and different econometric techniques than those used in this paper. For instance, Teng et al (2016) show evidence supporting the hypothesis that housing bubbles migrate from Taipei City (city center) to New Taipei City (suburbs).…”

Housing market bubbles and urban resilience: Applying systems theory

“…In various studies, a correlation is observed between the size of housing bubbles and property status as a leasehold or a freehold. It has been observed that markets with leasehold properties along with freehold options are more stable than the markets with just freehold properties, becasue leasehold options act as a counterforce to the rising prices of freehold properties and improving market resilience ( Teng et al, 2017 ).…”

The Inter-Tier Spread of Housing Bubbles: Are Luxury Markets to Blame?

“…In their model, price bubbles are the residual term of their measurement equation. Teng et al (2017) estimate housing price bubbles in a state-space representation, in which the residual term is further broken down into a bubble component and a non-bubble specification error component.…”

“…This study adopts the methods of Black et al (2006), Costello et al 2011, and Teng et al (2017). We approximate a formula for the present value of housing prices using a Taylor expansion series, and utilize the approximation as a basic component for a state-space representation of housing price dynamics.…”

“…Considerable work has been devoted to examine whether housing price dynamics exhibit a spatial pattern that is characterized by the spread of market disturbance from one specific region to other regions (see, inter alia, Lee et al, 2014;Tsai, 2015;Teng et al, 2017). However, few studies have been conducted to explore whether and how housing prices spread across quality tiers.…”