Episodes of Exuberance in Housing Markets: In Search of the Smoking Gun

Posted: 1 Oct 2016

See all articles by Enrique Martínez-García

Enrique Martínez-García

Federal Reserve Bank of Dallas - Research Department

Efthymios Pavlidis

Lancaster University - Department of Economics

Alisa Yusupova

Lancaster University - Lancaster University Management School

Ivan Paya

Lancaster University - Lancaster University Management School

David A. Peel

Lancaster University - Lancaster University Management School

Adrienne Mack

Federal Reserve Banks - Federal Reserve Bank of Dallas

Valerie Grossman

Federal Reserve Banks - Federal Reserve Bank of Dallas

Multiple version iconThere are 2 versions of this paper

Date Written: September 29, 2016

Abstract

In this paper, we examine changes in the time series properties of three widely used housing market indicators (real house prices, price-to-income ratios, and price-to-rent ratios) for a large set of countries to detect episodes of explosive dynamics. Dating such episodes of exuberance in housing markets provides a timeline as well as empirical content to the narrative connecting housing exuberance to the global 2008-09 recession. For our empirical analysis, we employ two recursive univariate unit root tests recently developed by Phillips et al. (2015) to a panel setting in order to exploit the large cross-sectional dimension of our international dataset. Statistically significant periods of exuberance are found in most countries. Moreover, we find strong evidence of the emergence of an unprecedented period of exuberance in the early 2000s that eventually collapsed around 2006-07, preceding the 2008-09 global recession. We examine whether macro and financial variables help to predict (in-sample) episodes of exuberance in housing markets. Long-term interest rates, credit growth and global economic conditions are found to be among the best predictors. We conclude that global factors (partly) explain the synchronization of exuberance episodes that we detect in the data in the 2000s.

Keywords: House prices; Mildly explosive time series; Sup ADF test; Generalized Sup ADF test; Panel GSADF; Probit model

JEL Classification: C22, G12, R30, R31

Suggested Citation

Martinez-Garcia, Enrique and Pavlidis, Efthymios G and Yusupova, Alisa and Paya, Ivan and Peel, David Alan and Mack, Adrienne and Grossman, Valerie, Episodes of Exuberance in Housing Markets: In Search of the Smoking Gun (September 29, 2016). Journal of Real Estate Finance and Economics, Vol. 53, No. 4, 2016, Available at SSRN: https://ssrn.com/abstract=2845460

Enrique Martinez-Garcia (Contact Author)

Federal Reserve Bank of Dallas - Research Department ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5262 (Phone)

HOME PAGE: http://sites.google.com/view/emgeconomics

Efthymios G Pavlidis

Lancaster University - Department of Economics ( email )

Lancaster LA1 4YX, LA1 4YX
United Kingdom

Alisa Yusupova

Lancaster University - Lancaster University Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Ivan Paya

Lancaster University - Lancaster University Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

David Alan Peel

Lancaster University - Lancaster University Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom
+44 (0)1524 593590 (Phone)
+44 (0)1524 594244 (Fax)

HOME PAGE: http://www.lancs.ac.uk/staff/peeld/

Adrienne Mack

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Valerie Grossman

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

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