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WP/23/33
IMF Working Paper
European Department
Bubble Detective: City-Level Analysis of House Price Cycles
Prepared by Serhan Cevik and and Sadhna Naik1
Authorized for distribution by Bernardin Akitoby
February 2023
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Abstract
This paper investigates house price dynamics at high frequency using city-level observations during the period 1994–2022 in Lithuania. We employ multiple time series-based econometric procedures to examine whether real house prices and house price-to-rent ratios exhibit explosive behavior. According to these recursive right-tailed test results, we reject 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. While the size of bubbles varies across cities, especially when we use the house price-to-rent ratio, there is clearly a similar boom-bust pattern. Large house price corrections can in turn have adverse effects on economic performance and financial stability, as experienced during the global financial crisis and other episodes in history.
| JEL Classification Numbers: | C12; C22; C33; C53; E31; E62; G12; G21; R21; R31 |
| Keywords: | House prices; bubbles; recursive unit root test; city-level; Lithuania |
| Author’s E-Mail Address: | scevik@imf.org; snaik@imf.org |
| JEL Classification Numbers: | C12; C22; C33; C53; E31; E62; G12; G21; R21; R31 |
| Keywords: | House prices; bubbles; recursive unit root test; city-level; Lithuania |
| Author’s E-Mail Address: | scevik@imf.org; snaik@imf.org |
The authors would like to thank Boris Balabanov, Nina Biljanovska, Romain Bouis, Alice Fan, Borja Gracia, Camila Perez, Axel Schimmelpfennig, and Cheryl Toksoz for their insightful comments and suggestions.