Evidence and Determinants of Real Estate Bubbles: The Case of Singapore

Abstract

This paper examines the evidence of real estate bubbles within Singapore's private residential market from 1978 to 2004. The determinants of real estate bubbles are also examined. The analysis generates two principle conclusions. First, using unit root tests and cointegration tests, we found evidence of explosive characteristics in the property price index as well as the accommodation index indicating the presence of real estate bubbles in the Singapore private residential market. However, in conducting a robustness check using the variance bounds test, fundamental property prices were just as volatile as actual observed prices. Therefore, evidence of real estate bubbles in Singapore's private residential market is inconclusive. Second, using polynomial distributed lag analysis, it was found that increases in domestic credit growth and growth in the Straits Times Index (STI) are related to the increase in the percentage deviation between actual property prices and calculated fundamental values. Real interest rates and Gross Domestic Product (GDP) growth were not significantly related to the deviation between actual and fundamental real estate prices.

Keywords: real estate bubbles, macroeconomic variables, multifactor models, polynomial distributed lags

JEL Classification: G15