Bubble Detective: City-Level Analysis of House Price Cycles

IMF Working Papers, February 17, 2023

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Investigation of house price dynamics at high frequency using city-level observations during the period 1994-2022 in Lithuania.
Employs multiple time series-based econometric procedures to examine whether real house prices and house price-to-rent ratios exhibit explosive behavior.
Recursive right-tailed test results lead to rejection of the null hypothesis of no-bubble and find evidence for long and multiple periods of explosive behavior in the real estate market in all major cities during the sample period.
Size of bubbles varies across cities, especially when using the house price-to-rent ratio, but there is a similar boom-bust pattern across cities.
Large house price corrections can have adverse effects on economic performance and financial stability, as experienced during the global financial crisis and other historical episodes.

Data: city-level observations for Lithuania, period 1994-2022.
Variables analyzed: real house prices and house price-to-rent ratios.
Econometric approach: multiple time series-based procedures with recursive right-tailed tests (recursive unit root test referenced in keywords).

Rejection of the null hypothesis of no-bubble based on recursive right-tailed test results.
Evidence of long and multiple periods of explosive behavior in real estate markets across all major Lithuanian cities during 1994-2022.
Heterogeneity across cities in the magnitude of bubbles, with particularly notable variation when analyzing house price-to-rent ratios.
Consistent identification of a boom-bust pattern across cities despite city-level differences.

Large house price corrections identified by the analysis can have adverse effects on:
- Economic performance.
- Financial stability.
Historical context cited: adverse effects observed during the global financial crisis and other episodes in history.