Inside a Bubble and Crash: Evidence from the Valuation of Amenities
34 Pages Posted: 19 Feb 2012 Last revised: 18 Jul 2013
Date Written: May 2013
Housing markets and their cycles are central to understanding macroeconomic fluctuations. As housing is an inherently spatial market, an understanding of the economics of location-specific amenities is needed. This paper examines this topic, using a rich dataset of over 1.2 million sales and rental listings in Ireland, from the peak of a real estate bubble in 2006 to 2012 when prices had fallen by more than half, and 25 primary location-specific characteristics. It finds clear evidence that the price effects of amenities are greater than rent effects, something that may be explained by either tenant search thresholds or buyers' desire to "lock in" access to fixed-supply amenities. Buyer lock-in concerns would be most prevalent at the height of a bubble and thus would be associated with pro-cyclical amenity pricing. Instead there is significant evidence that the relative price of amenities is counter-cyclical. This suggests the Irish housing market bubble was characterized by "property ladder" effects, rather than "lock-in" concerns.
Keywords: Housing markets, amenity valuation, search costs, market cycles
JEL Classification: R31, E32, H4, D62, H23
Suggested Citation: Suggested Citation