Pricked by the Virus for good? Real Estate Bubbles and the Grand European Shutdown

Abstract

Research Question: The objective of this particular piece of research was to evaluate the condition of the real estate market in the period preceding the pandemic outbreak. Motivation: Our goal was to determine whether real estate has been overpriced, i.e., whether and when speculative bubbles began to form and whether there were indications of their bursting. This paper brings together the need for discussing theories that can potentially explain the real estate market bubbles and boom-bust cycles (Gleaser &Nathanson, 2014) and the new approach which proved promising to detect the exuberance of economic and financial activities (Phillips, Shi &Yu, 2015). Potential collapse of real estate prices would have devastating effects and would likely cause a collapse of the financial system. Idea: The core idea of this paper was to evaluate whether speculative bubbles could be detected in the real estate market over the period immediately before the outbreak of the COVID-19 virus pandemic, and whether the pandemic or the financial crisis arising from it led to bursting of bubbles in this market and consequently brought their economies into even deeper crises. Data: Quarterly price movements were analyzed in the real estate market in six countries: Italy, Spain, the United Kingdom, Serbia, Croatia and Slovenia in the period Q1 1980 - Q4 2019 for Italy, Spain and the United Kingdom; Q1 2002 - Q4 2019 for Serbia and Croatia and Q1 2007 - Q4 2019 for Slovenia. Tools: Empirical analysis has been performed by utilizing generalized sub-augmented Dickey-Fuller (GSADF) test of unit roots for the detection and data stamping of bubbles in the real estate market in time series at hand. Findings: In conclusion, grand European shutdown and COVID pandemic apparently did not prick multiplicity of previously formed real estate bubbles, at least not for the time being. Moreover, in several developing countries with stunted financial markets, the virus may have somewhat paradoxically solidified real estate prices and even sustained a build-up of rational real estate bubbles. Contribution: This paper expands previous research on real estate bubbles and provides new insights into the initial consequences of the COVID-19 pandemic.

Residential real estate analysis in Serbia

“…Any burst of that bubble will undoubtedly cause instability and long-term consequences in the financial and real estate sectors. As a result, the challenge is to detect the price bubble early and minimize its negative consequences (Malović et al, 2021). Various models, such as Growth at Risk (GaR), which is based on the assessment of financial conditions and the cyclical dimension of systemic risk (O'Brien & Wosser, 2021), are used to detect the price bubble early and prevent its impact on financial stability in a timely manner.…”