Price bubbles in housing markets: Concept, theory and indicators

Abstract

Purpose

The purpose of this paper is to clarify the concept of bubble, what it means to explain a bubble and propose a list of bubble indicators.

Design/methodology/approach

The paper is based on a literature review and some philosophical ideas to derive conclusions for the problems studied.

Findings

A price bubble should be defined only in relation to the development of prices: a dramatic increase immediately followed by a dramatic fall. The traditional definition in terms of prices not determined by fundamentals is problematic primarily because the concept “fundamentals” is vague. A bubble can never be explained by a single factor, but is the result of the interaction of a number of factors. The explanatory factors proposed are used to derive a set of indicators working as warning signals whether a dramatic increase in prices will be followed by a dramatic fall. The list developed covers, for example, interest costs in relation to household incomes, the elasticity of supply, price expectations and credit conditions.

Research limitations/implications

Both the explanatory framework and the list of indicators should be seen as preliminary and the starting point for further development through empirical testing.

Practical implications

A developed list of bubble indicators could be useful for a number of actors, e.g. banks and authorities responsible for monitoring financial stability.

Originality/value

The contribution is a clearer and more useful concept of bubble, a clearer separation of the question whether bubbles exist and how they should be explained. The proposed list of indicators goes far beyond earlier indicators.

Citation

Lind, H. (2009), "Price bubbles in housing markets: Concept, theory and indicators", International Journal of Housing Markets and Analysis, Vol. 2 No. 1, pp. 78-90. https://doi.org/10.1108/17538270910939574