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Detecting Bubbles in the US and UK Real Estate Markets

Fabozzi, Frank, Kynigakis, Iason, Panopoulou, Ekaterini, Tunaru, Radu (2019) Detecting Bubbles in the US and UK Real Estate Markets. Journal of Real Estate Finance and Economics, 60 . pp. 469-513. ISSN 0895-5638. (doi:10.1007/s11146-018-9693-9) (KAR id:71012)

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Official URL:
https://doi.org/10.1007/s11146-018-9693-9

Abstract

This study considers state of the art subset selection and shrinkage procedures − stepwise regression, ridge regression, lasso, bridge regression and the elastic net along with the commonly employed least squares regression − to detect bubbles in real estate markets. Our analysis of real estate indices representing the commercial, residential and equity real estate sectors in the United States and the United Kingdom finds evidence suggesting the existence of significant periods of overvaluation in residential real estate, as well as economically significant periods of undervaluation in equity real estate markets. The evolution of specific real estate indices in the United States is similar to the evolution of the corresponding indices in the United Kingdom. In order to determine whether the observed deviations of the actual price index from its fundamental value are due to the presence of bubbles, we use two complementary methodologies, the first based on right-side unit root tests for explosive behaviour and the second defined by regime switching models for bubbles. We show that employing an average of all complex models yields more robust forecasting over an 8 years out-of-sample period.

Item Type: Article
DOI/Identification number: 10.1007/s11146-018-9693-9
Uncontrolled keywords: Bubbles identification, Fundamental value, Real estate index, Right-side unit root tests, Regime switching models
Divisions: Divisions > Kent Business School - Division > Department of Accounting and Finance
Depositing User: Ekaterini Panopoulou
Date Deposited: 13 Dec 2018 16:41 UTC
Last Modified: 07 Oct 2021 13:39 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/71012 (The current URI for this page, for reference purposes)
Panopoulou, Ekaterini: https://orcid.org/0000-0001-5080-9965
Tunaru, Radu: https://orcid.org/0000-0002-5623-9876
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