Explosive Bubbles in House Prices? Evidence from the OECD Countries

24 Pages Posted: 13 Jan 2015

See all articles by Tom Engsted

Tom Engsted

University of Aarhus - CREATES

Simon Hviid

Aarhus University

Thomas Quistgaard Pedersen

Aarhus University - CREATES

Date Written: January 12, 2015

Abstract

We conduct an econometric analysis of bubbles in housing markets in the OECD area, using quarterly OECD data for 18 countries from 1970 to 2013. We pay special attention to the explosive nature of bubbles and use econometric methods that explicitly allow for explosiveness. First, we apply the univariate right-tailed unit root test procedure of Phillips et al. (2012) on the individual countries price-rent ratio. Next, we use Engsted and Nielsen's (2012) co-explosive VAR framework to test for bubbles. We find evidence of explosiveness in many housing markets, thus supporting the bubble hypothesis. However, we also find interesting differences in the conclusions across the two test procedures. We attribute these differences to how the two test procedures control for cointegration between house prices and rent.

Keywords: Co-explosive VAR model, right-tailed unit root tests, date-stamping bubble periods, price-to-rent ratio

JEL Classification: C22, C32, G12

Suggested Citation

Engsted, Tom and Hviid, Simon and Pedersen, Thomas Quistgaard, Explosive Bubbles in House Prices? Evidence from the OECD Countries (January 12, 2015). Available at SSRN: https://ssrn.com/abstract=2548466 or http://dx.doi.org/10.2139/ssrn.2548466

Tom Engsted (Contact Author)

University of Aarhus - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Simon Hviid

Aarhus University ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Thomas Quistgaard Pedersen

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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