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

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


Hanxiong Zhang

Hugh Metcalf

Viktor Manahov


© 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.

Journal Article Type Article
Publication Date Dec 2, 2015
Journal Applied economics
Print ISSN 0003-6846
Electronic ISSN 1466-4283
Publisher Taylor & Francis (Routledge)
Peer Reviewed Peer Reviewed
Volume 47
Issue 56
Pages 6088-6101
APA6 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.
Keywords House price bubbles; Expectation hypothesis; State space model; User cost
Publisher URL
Additional Information Peer Review Statement: The publishing and review policy for this title is described in its Aims & Scope.; Aim & Scope: http://www.tandfonline....cope&journalCode=raec20


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