Advertisement

Empirical Economics

, Volume 51, Issue 2, pp 483–516 | Cite as

Testing for a housing bubble at the national and regional level: the case of Israel

  • Itamar CaspiEmail author
Article

Abstract

Between 2008 and 2013, home prices in Israel appreciated by roughly 50 % in real terms, with increases in nearly 60 % in some regions. This paper examines whether this phenomenon reflects the presence of a national or regional housing bubble by applying econometric tests for explosive behavior to quality-adjusted national- and regional-level data on the home price to rent ratio, while controlling for various fundamental factors, including interest rates, income and the leverage ratio. Overall, study results indicate that the national- and regional-level data are inconsistent with a housing bubble scenario. Most of the results are robust to a variety of tests and alternate specifications. The framework I provide to study the Israeli case may be applied to study other housing markets facing similar developments.

Keywords

Explosiveness tests Housing bubble Dynamic Gordon growth model Regional data Israel 

JEL Classification

C22 G12 R21 

Notes

Acknowledgments

I thank Yossi Yakhin, Nathan Sussman, Akiva Offenbacher, Sigal Ribon, Offer Lieberman, Jonathan Benchimol, Dana Orfaig, Nadav Steinberg, Lior Gallo, two anonymous referees, as well as the participants at the Bank of Israel’s Research Department seminar and the DIW Macroeconometric Workshop for helpful comments and discussions.

References

  1. Arshanapalli B, Nelson W (2008) A cointegration test to verify the housing bubble. Int J Bus Finance Res 2(2):35–43Google Scholar
  2. Ben Basat A (2002) The Israeli economy, 1985–1998: from government intervention to market economics. MIT Press, CambridgeGoogle Scholar
  3. Brunnermeier MK (2008) Bubbles. In: Durlauf SN, Blume LE (eds) The new Palgrave dictionary of economics. Palgrave Macmillan, BasingstokeGoogle Scholar
  4. Campbell JY, Shiller RJ (1988) The dividend-price ratio and expectations of future dividends and discount factors. Rev Financ Stud 1(3):195–228CrossRefGoogle Scholar
  5. Campbell SD, Davis MA, Gallin J, Martin RF (2009) What moves housing markets: a variance decomposition of the rent-price ratio. J Urban Econ 66(2):90–102CrossRefGoogle Scholar
  6. Case KE, Shiller RJ (2003) Is there a bubble in the housing market? Brook Pap Econ Activity 2003(2):299–362CrossRefGoogle Scholar
  7. Caspi I (2013) Rtadf: testing for bubbles with EViewsGoogle Scholar
  8. Clark SP, Coggin TD (2011) Was there a us house price bubble? An econometric analysis using national and regional panel data. Q Rev Econ Finance 51(2):189–200CrossRefGoogle Scholar
  9. Diba BT, Grossman HI (1988a) Explosive rational bubbles in stock prices? Am Econ Rev 78(3):520–530Google Scholar
  10. Diba BT, Grossman HI (1988b) The theory of rational bubbles in stock prices. Econ J 98(392):746–754CrossRefGoogle Scholar
  11. Dickey DA, Fuller WA (1979) Distribution of the estimators for autoregressive time series with a unit root. J Am Stat Assoc 74(366a):427–431CrossRefGoogle Scholar
  12. Dovman P, Ribon S, Yakhin Y (2012) The housing market in Israel 2008–2010: are house prices a ’bubble’? Israel Econ Rev 10(1):1–30Google Scholar
  13. Engsted T, Pedersen TQ, Tanggaard C (2012) The log-linear return approximation, bubbles, and predictability. J Financ Quant Anal 47(3):643CrossRefGoogle Scholar
  14. Engsted T, Hviid SJ, Pedersen TQ (2014) Explosive bubbles in house prices? Evidence from the OECD countriesGoogle Scholar
  15. Evans GW (1991) Pitfalls in testing for explosive bubbles in asset prices. Am Econ Rev 81(4):922–930Google Scholar
  16. Flood RP, Hodrick RJ (1990) On testing for speculative bubbles. J Econ Perspect 4(2):85–101CrossRefGoogle Scholar
  17. Froot KA, Obstfeld M (1992) Intrinsic bubbles: the case of stock prices. In: Technical report, National Bureau of Economic ResearchGoogle Scholar
  18. Galí J (2014) Monetary policy and rational asset price bubbles. Am Econ Rev 104(3):721–752CrossRefGoogle Scholar
  19. Glaeser EL, Gyourko J, Saiz A (2008) Housing supply and housing bubbles. J Urban Econ 64(2):198–217CrossRefGoogle Scholar
  20. Gürkaynak R (2008) Econometric tests of asset price bubbles: taking stock. J Econ Surv 22(1):166–186CrossRefGoogle Scholar
  21. Hamilton JD (1986) On testing for self-fulfilling speculative price bubbles. Int Econ Rev 27(3):545–552CrossRefGoogle Scholar
  22. Himmelberg C, Mayer C, Sinai T (2005) Assessing high house prices: bubbles, fundamentals and misperceptions. J Econ Perspect 19(4):67–92CrossRefGoogle Scholar
  23. Homm U, Breitung J (2012) Testing for speculative bubbles in stock markets: a comparison of alternative methods. J Financ Econom 10(1):198–231CrossRefGoogle Scholar
  24. Iraola MA, Santos MS (2008) Speculative bubbles. In: Durlauf SN, Blume LE (eds) The new Palgrave dictionary of economics. Palgrave Macmillan, BasingstokeGoogle Scholar
  25. LeRoy SF, Porter RD (1981) The present-value relation: tests based on implied variance bounds. Econ J Econ Soc 49(3):555–574Google Scholar
  26. Liviatan N (2003) Fiscal dominance and monetary dominance in the Israeli monetary experience, bank of Israel. Discussion paper no. 2003:17Google Scholar
  27. Mack A, Martínez-García E (2011) A cross-country quarterly database of real house prices: a methodological note. In: Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute working paper, no. 99Google Scholar
  28. McCarthy J, Peach RW (2004) Are home prices the next ’bubble’? FRBNY Econ Policy Rev 10(3):1–17Google Scholar
  29. Nagar W, Segal G (2010) What explains the movements in home prices and rent in Israel during 1999–2010? (in Hebrew). In: Bank of Israel Survey, vol 85, pp 7–59Google Scholar
  30. Pavlidis E, Yusupova A, Paya I, Peel D, Martinez-Garcia E, Mack A, Grossman V (2013) Monitoring housing markets for episodes of exuberance: an application of the phillips et al. (2012, 2013) GSADF test on the dallas fed international house price database. In: Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute Working Paper (165)Google Scholar
  31. Phillips PCB, Magdalinos T (2007) Limit theory for moderate deviations from a unit root. J Econom 136(1):115–130CrossRefGoogle Scholar
  32. Phillips PCB, Yu J (2009) Limit theory for dating the origination and collapse of mildly explosive periods in time series data, Sim Kee Boon Institute for Financial Economics, Singapore Management University, Unpublished manuscriptGoogle Scholar
  33. Phillips PCB, Yu J (2011) Dating the timeline of financial bubbles during the subprime crisis. Quant Econ 2(3):455–491CrossRefGoogle Scholar
  34. Phillips PCB, Wu Y, Yu J (2011) Explosive behavior in the 1990s NASDAQ: when did exuberance escalate asset values? Int Econ Rev 52(1):201–226CrossRefGoogle Scholar
  35. Phillips PCB, Shi S, Yu J (2015a) Testing for multiple bubbles: limit theory of dating algorithms. Int Econ Rev (forthcoming)Google Scholar
  36. Phillips PCB, Shi S, Yu J (2015b) Testing for multiple bubbles: historical episodes of exuberance and collapse in the S&P 500. Int Econ Rev (forthcoming)Google Scholar
  37. Poterba J (1984) Tax subsidies to owner-occupied housing: an asset-market approach. Q J Econ 99(4):729--752. http://qje.oxfordjournals.org/content/99/4/729.short
  38. Santos MS, Woodford M (1997) Rational asset pricing bubbles. Econom J Econom Soc 65(1):19–57Google Scholar
  39. Scherbina A (2013) Asset price bubbles: a selective survey. In: International monetary fundGoogle Scholar
  40. Shiller RJ (1981) Do stock prices move too much to be justified by subsequent changes in dividends? Am Econ Rev 71(3):421–436Google Scholar
  41. Smith MH, Smith G (2006) Bubble, bubble, where’s the housing bubble? Brook Pap Econ Activity 2006(1):1–67CrossRefGoogle Scholar
  42. Taipalus K (2006) A global house price bubble? Evaluation based on a new rent-price approach Bank of Finland Research Discussion Papers, 29Google Scholar
  43. Taylor JB (2007) Housing and monetary policy. In: Working paper 13682, National Bureau of Economic Research. doi: 10.3386/w13682, http://www.nber.org/papers/w13682
  44. West KD (1987) A specification test for speculative bubbles. Q J Econ 102(3):553–580CrossRefGoogle Scholar
  45. Wu Y (1995) Are there rational bubbles in foreign exchange markets? Evidence from an alternative test. J Int Money Finance 14(1):27–46CrossRefGoogle Scholar
  46. Yiu MS, Yu J, Jin L (2013) Detecting bubbles in Hong Kong residential property market. J Asian Econ 28(2013):115–124CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2015

Authors and Affiliations

  1. 1.Research DepartmentBank of IsraelJerusalemIsrael

Personalised recommendations