Price_bubbles

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IJHMA 2,1 78 International Journal of Housing Markets and Analysis Vol. 2 No. 1, 2009 pp. 78-90 # Emerald Group Publishing Limited 1753-8270 DOI 10.1108/17538270910939574 Received 15 September 2008 Revised 29 October 2008 Accepted 12 November 2008 Price bubbles in housing markets Concept, theory and indicators Hans Lind Division of Building and Real Estate Economics, Royal Institute of Technology, Stockholm, Sweden Abstract Purpose – The purpose of this paper is to clarify the concept of bubble, what it means to explain a bubble and propose a list of bubble indicators. Design/methodology/approach – The paper is based on a literature review and some philosophical ideas to derive conclusions for the problems studied. Findings – A price bubble should be defined only in relation to the development of prices: a dramatic increase immediately followed by a dramatic fall. The traditional definition in terms of prices not determined by fundamentals is problematic primarily because the concept ‘‘fundamentals’’ is vague. A bubble can never be explained by a single factor, but is the result of the interaction of a number of factors. The explanatory factors proposed are used to derive a set of indicators working as warning signals whether a dramatic increase in prices will be followed by a dramatic fall. The list developed covers, for example, interest costs in relation to household incomes, the elasticity of supply, price expectations and credit conditions. Research limitations/implications – Both the explanatory framework and the list of indicators should be seen as preliminary and the starting point for further development through empirical testing. Practical implications – A developed list of bubble indicators could be useful for a number of actors, e.g. banks and authorities responsible for monitoring financial stability. Originality/value – The contribution is a clearer and more useful concept of bubble, a clearer separation of the question whether bubbles exist and how they should be explained. The proposed list of indicators goes far beyond earlier indicators. Keywords Pricing, Housing, Financial analysis Paper type Research paper 1. Introduction In the last five years there has been a discussion in many countries about whether there was a bubble on the housing market[1]. An interesting feature of this debate is the large disagreements between different participants, both among academic writers and in the more general debate. In the scientific debate, Case and Shiller (2003) and Shiller (2007a, b) argue that there were clear indicators of a bubble in the USA. This conclusion was questioned by e.g. Quigley (2003), Himmelberg et al. (2005) and Smith and Smith (2006). In the more popular debate The Economist in 2005 described the situation on the housing market as the largest bubble in history. But it is also easy to find popular articles arguing against this view, e.g. Krainer (2003). Disagreements about price bubbles are not new. Garber (1990), e.g. argues that even
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This note was uploaded on 03/06/2012 for the course MCOM 320 taught by Professor Kawai during the Winter '11 term at BYU.

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Price_bubbles - The current issue and full text archive of...

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