Identification of house price bubbles using user cost in a state space model

Zhang, Hanxiong; Hudson, Robert; Metcalf, Hugh; Manahov, Viktor

Abstract

© 2015 Taylor & Francis. This article studies how much variation in house prices results from nonfundamental factors. We propose a relative valuation approach to quantifying a bubble in housing by incorporating the housing User Cost into a state space model. We find that UK house prices were undervalued from January 1995 to May 2001 and subsequently moved into a bubble over the period to October 2012. Our results support the bounded rationality hypothesis in the long run. However, we also find that the irrational and the rational expectation hypotheses can coexist in the short run when explosive bubbles are driven by price dynamics.

Citation

Zhang, H., Hudson, R., Metcalf, H., & Manahov, V. (2015). Identification of house price bubbles using user cost in a state space model. Applied economics, 47(56), 6088-6101. https://doi.org/10.1080/00036846.2015.1064078

• Journal Article Type: Article
• Acceptance Date: Jun 16, 2015
• Online Publication Date: Jul 7, 2015
• Publication Date: Dec 2, 2015
• Deposit Date: Jul 28, 2015
• Publicly Available Date: Jul 28, 2015
• Journal: Applied economics
• Print ISSN: 0003-6846
• Electronic ISSN: 1466-4283
• Publisher: Routledge
• Peer Reviewed: Peer Reviewed
• Volume: 47
• Issue: 56
• Pages: 6088-6101
• DOI: https://doi.org/10.1080/00036846.2015.1064078
• Keywords: House price bubbles; Expectation hypothesis; State space model; User cost
• Public URL: https://hull-repository.worktribe.com/output/377026
• Publisher URL: http://www.tandfonline.com/doi/full/10.1080/00036846.2015.1064078#.VbePCU_bI6I
• Additional Information: Peer Review Statement: The publishing and review policy for this title is described in its Aims & Scope.; Aim & Scope: http://www.tandfonline.com/action/journalInformation?show=aimsScope&journalCode=raec20