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

97 Pages Posted: 17 May 2014 Last revised: 21 Oct 2015

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

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2015

Abstract

We test for the existence of housing bubbles associated with a failure of the transversality condition that requires the present value of payments occurring infinitely far in the future to be zero. The most prominent such bubble is the classic rational bubble. We study housing markets in the U.K. and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are finitematurity, 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 failures of the transversality condition in housing markets in the U.K. and Singapore, even during periods when a sizeable bubble was regularly thought to be present.

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

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

Suggested Citation

Giglio, Stefano and Maggiori, Matteo and Stroebel, Johannes, No-Bubble Condition: Model-Free Tests in Housing Markets (May 1, 2015). Fama-Miller Working Paper. Available at SSRN: https://ssrn.com/abstract=2437563 or http://dx.doi.org/10.2139/ssrn.2437563

Stefano Giglio

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Matteo Maggiori

Harvard University ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Johannes Stroebel (Contact Author)

New York University (NYU) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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