Diagnosing housing fever with an econometric thermometer
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ACDE Seminar
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Econometricians can help minimize the harm created by a housing bubble by providing a “thermometer” for diagnosing “housing fever”. This paper reviews the literature on econometric methods for identifying housing bubbles, discussing some new methods of research and providing an empirical application. A major challenge is to assess prices in relation to fundamentals. One solution is to estimate the fundamental component from an underlying structural relationship. A second aim of the paper is to improve the estimation accuracy of fundamentals by means of an easy-to-implement reduced-form approach. We use the IVX method to estimate the reduced-form model to reduce the finite sample bias arising from highly persistent regressors and endogeneity. A recursive evolving test is applied to the estimated non-fundamental component for bubble identification. An empirical application to Australian housing markets highlights the importance of accurate estimation of these housing market fundamentals.
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