No-Bubble Condition: Model-Free Tests in Housing Markets
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
Harvard University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
New York University (NYU)
May 15, 2014
Fama-Miller Working Paper
We test for the existence of infinitely-lived bubbles in housing markets by directly measuring failures of the pricing condition requiring the present value of infinite-maturity payments to be zero. This condition is central to workhorse models of bubbles. In the U.K. and Singapore, property ownership takes the form of either leaseholds or freeholds. Leaseholds are finite-maturity ownership contracts with maturities often exceeding 700 years; freeholds are perpetual contracts. The price difference between long-maturity leaseholds and freeholds reflects the present value of the freehold after leasehold expiry, thus directly measuring the no-bubble condition. We find no evidence of infinitely-lived bubbles.
Number of Pages in PDF File: 26
Keywords: Asset Pricing, Real Estate, Efficient Market Hypothesis, Behavioral Economics, Irrational Exuberance
JEL Classification: E44, G02, G12, G14, R30working papers series
Date posted: May 17, 2014 ; Last revised: September 20, 2014
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