Detecting Imbalances in House Prices: What Goes Up Must Come Down?

Norges Bank Research

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Date Published November 2016
Primary Author Andre K. Anundsen
Other Authors
Theme Real Estate Cycles and Bubbles
Country Finland, Norway, United States


With the aid of econometric modeling, I investigate whether rapidly increasingly house prices necessarily imply the existence of a bubble that will eventually burst. I consider four alternative econometric methods to construct indicators of housing market imbalances for the US, Finland and Norway. The four approaches are used to study if house prices in these countries in the 2000s can be explained by underlying economic fundamentals, or whether the developments are best characterized by bubble-dynamics. For the US, all measures unanimously suggest a bubble in the early to mid 2000s, whereas current US house prices are found to be aligned with economic fundamentals. Only one of the measures indicate imbalances in the Finnish housing market, while none of the measures suggest a bubble in Norway.

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