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http://ssrn.com/abstract=2437563
 
 

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No-Bubble Condition: Model-Free Tests in Housing Markets


Stefano Giglio


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Matteo Maggiori


Harvard University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Johannes Stroebel


New York University (NYU)

November 2, 2014

Fama-Miller Working Paper

Abstract:     
We test for the existence of classic rational bubbles in housing markets by directly measuring failures of the transversality condition that requires the present value of payments occurring infinitely far in the future to be zero. We study housing markets in the U.K. and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are finite maturity, pre-paid, and tradable ownership contracts with maturities often exceeding 700 years. Freeholds are infinite maturity ownership contracts. The price difference between leaseholds with extremely long maturities and freeholds reflects the present value of a claim to the freehold after leasehold expiry, and is thus a direct empirical measure of the transversality condition. We estimate this price difference, and find no evidence for classic rational bubbles in housing markets in the U.K. and Singapore, even during periods when a sizeable bubble was regularly thought to be present.

Number of Pages in PDF File: 47

Keywords: Asset Pricing, Real Estate, Rational Bubbles, House Prices, Financial Crisis

JEL Classification: E44, G02, G12, G14, R30

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Date posted: May 17, 2014 ; Last revised: December 16, 2014

Suggested Citation

Giglio, Stefano and Maggiori, Matteo and Stroebel, Johannes, No-Bubble Condition: Model-Free Tests in Housing Markets (November 2, 2014). Fama-Miller Working Paper. Available at SSRN: http://ssrn.com/abstract=2437563 or http://dx.doi.org/10.2139/ssrn.2437563

Contact Information

Stefano Giglio
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Matteo Maggiori
Harvard University ( email )
1875 Cambridge Street
Cambridge, MA 02138
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Johannes Stroebel (Contact Author)
New York University (NYU) ( email )
Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States
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