Research Discussion Papers, Bank of Finland
No 29/2006:
A global house price bubble? Evaluation based on a new rent-price approach
Katja Taipalus ()
Abstract: The dividend yield ratio in the stock markets is, to an
extent, comparable to the rent-price ratio in the housing market. Taking
advantage of this definitional similarity, one can then use the traditional
unit root test for log dividend yield – in this case, the log rent-price
ratio – to test for the existence of real estate bubbles. Such unit root
tests are conducted for Finland, USA, UK, Spain and Germany, and the simple
test results strongly suggest the existence of bubbles in nearly all of
these countries. In addition to this, we develop a continuous and monthly
rent-price information-based method to track the periods when real estate
prices diverge from their fundamental levels. This indicator seems to work
quite well in most cases, indicating bubbles during periods which,
according to the consensus literature, are seen as periods of sizable
upward or downward shifts in house prices.
Keywords: house price; bubble; unit root; (follow links to similar papers)
JEL-Codes: G12; (follow links to similar papers)
68 pages, November 23, 2006
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