An Empirical Analysis of House Price Bubble: Housing Bubbles

Studies have also documented substantial evidence of bubbles in Asian and East Asian countries such as Japan, Korea, Hong Kong, China and Thailand. Quigley argued that the over-booming and fluctuations of real estate markets in some Southeast and East Asian countries contributed to the 1997 Asian financial crisis. For example, Table 1 shows that Hong Kong and the Philippines housing markets were most severely affected by the Asian financial crisis. In Hong Kong, the house price index decreased by 61.34% and in Philippines by 56.20%. Higher volatility in the Hong Kong housing market appears to have been caused by the availability of residential land and the monopolization of the market by a few real estate developers. For the Philippines, the decrease in the house price index was likely caused by high transaction costs in buying and selling property assets (16.23%- 23.75%) and the high volume of housing stock available in the market stemming from less demand by professional expatriates as the global economic recession took hold. Calhoun examined house price indices (HPI) in Thailand from the pre-crisis period to the post-crisis period. Using a hedonic property valuation model, Calhoun found significant regional differences in house price appreciation rates for both the pre-crisis and post-crisis periods. Thirty of 76 provinces in Thailand showed negative HPI appreciation rates from 1992 to 1997, while eight other provinces showed negative HPI appreciation rates of more than 30 %. In the post-crisis period, negative HPI appreciations were recorded in 69 of 76 provinces. Therefore, during the boom in the Thailand real estate market, many provinces seemed to experience negative growth in house prices. This conclusion was supported by Wong, who also described the formation of bubbles in Thailand’s housing market prior to the 1997 Asian financial crisis. Small business

Kim and Suh found a particular form of bubble in the Japanese and Korean housing markets. The authors used an equilibrium price equation, which included the GDP stock price index and household consumption expenditure, and found evidence of both nominal and real bubbles in the Japanese market. They were unable to reject the null hypothesis of no bubbles in the Korean real housing prices. In another study, Kim used a Kalman Filter approach to estimate the size of housing price bubbles in Korea. The author showed that bubbles existed in the Korean housing market in the period 1992 to 2001 (except for 1998), with overvaluation in house prices ranging from 44% to 55%.
Chan et al. used the signal extraction approach of Durlauf and Hall to detect the unobservable model noise and the misspecification error in three urban areas of the Hong Kong property market. Evidence of a bubble caused by misspecification error was found in Hong Kong Island, Kowloon and New Kowloon, with bubble explosions from 1990 to 1992 and from 1995 to 1997.
Wong found similar bubbles in the Hong Kong residential housing market. That study examined the movement in Hong Kong house prices, with the analysis including fundamental factors such as housing stock construction costs, population growth and interest rates, from 1992 to 1998. Xia and Tan used a Kalman Filter to test for an existence of bubbles from the 1980s to the 1990s in the Hong Kong property market. Using a combination of fundamental variables and speculative bubbles, Kalra et al., and Peng examined a Hong Kong property price model. Their study showed that half of the movements in Hong Kong property prices were explained by fundamental variables, with the other half due to the inflation of a bubble which tends to appear after the collapse of bubbles in some cases.
There is evidence that the strong growth in China‘s economy and rapid development of the real estate market have contributed to the increase of house prices in China. Qi and Li built a model to explain the increase in China’s real estate prices by examining the relationship between real estate prices and bubbles. The results of their study show that three main factors have contributed to the increase of real estate prices in China and the formation of real estate bubbles. These include increased market demand for real estate assets, more opportunities in terms of credit from financial institutions and an oligopoly-type competitive market.
Shen et al. examined the Beijing and Shanghai housing markets using a Granger causality test and generalized impulse response analysis. The economic fundamentals utilised in the model included disposable income of urban households, GDP and the stock price indices for both cities. Results suggest that only the Shanghai housing market experienced a housing bubble in 2003. Shanghai housing prices deviated 22% from the market fundamental values and this deviation can be attributed to the bubble.

Table 1: House Price Indexes Movement during and after the Asian Financial Crisis for Selected Asian countries

Country During crisis period After crisis period
Hong Kong -61.34% +60.72%
Philippines -56.20% + 14.11%
Indonesia -48.71% +13.59%
Singapore -45.57% +20.31%
South Korea -20.31% +24.28%
Thailand -19.54% +29.34% (1999-2006
Malaysia -18.78% +10.70%