Testing for a Housing Bubble at the National and Regional Level: The Case of Israel
Between 2008 and 2013, home prices in Israel appreciated by roughly 50 percent in real terms, with increases of nearly 60 percent in some regions. This paper examines whether this phenomenon reflects the presence of a national or regional housing bubble by applying econometric tests for explosive behavior to quality-adjusted national and regional level data on the home price to rent ratio, while controlling for various fundamental factors, including interest rates, income and the leverage ratio. Overall, study results indicate that the recent housing price appreciations at the national and regional levels are consistent with the developments of the fundamentals – supply and demand factors that are represented by rent payments and interest rates – and not with a housing bubble scenario. Most of the results are robust to a variety of tests and alternate specifications. The framework I provide to study the Israeli case may be applied to study other housing markets facing similar developments.
Keywords: Explosiveness tests, housing bubble, dynamic Gordon growth model,
regional data, Israel
JEL Classification: C22, G12, R21