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What Causes Housing Bubbles? a Theoretical and Empirical Inquiry

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What Causes Housing Bubbles? a Theoretical and Empirical Inquiry A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Joebges, Heike; Dullien, Sebastian; Márquez-Velázquez, Alejandro Research Report What causes housing bubbles? A theoretical and empirical inquiry IMK Study, No. 43 Provided in Cooperation with: Macroeconomic Policy Institute (IMK) at the Hans Boeckler Foundation Suggested Citation: Joebges, Heike; Dullien, Sebastian; Márquez-Velázquez, Alejandro (2015) : What causes housing bubbles? A theoretical and empirical inquiry, IMK Study, No. 43, Hans- Böckler-Stiftung, Institut für Makroökonomie und Konjunkturforschung (IMK), Düsseldorf, http://nbn-resolving.de/urn:nbn:de:101:1-201602195116 This Version is available at: http://hdl.handle.net/10419/148241 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Dezember 2015 43 Institut für Makroökonomie und Konjunkturforschung Macroeconomic Policy Institute Study Heike Joebges1, Sebastian Dullien2, Alejandro Márquez-Velázquez3 What causes housing bubbles? A theoretical and empirical inquiry4 The paper investigates in how far lax monetary policy (defined as devia- tions from prescriptive monetary policy rules or past trends) and/or financial innovation can be seen as a cause for housing price bubbles in industri- alized countries. From a theoretical perspective, it is found that there are hardly any clearly formulated economic models which assign a role to lax monetary policy in bubble formation while there are a number of models which assign a role to financial innovation or liberalization. In the empirical part, the paper first presents cross-country-time-series SUR regressions for a sample of 16 industrialized countries. According to the results, there is no robust significant role for the relevance of loose monetary policy, measured by deviations from the Taylor rule. Instead, deviations from the past trend of the real policy rate affect housing prices, but the size of the effect depends on the regulation and development of the financial sector. In a third step, three case studies of the United States, Austria and the United Kingdom are presented, representing countries which have experienced a) lax monetary policy and a bubble b) lax monetary policy without a bubble and c) no deviation from the Taylor rule and a bubble. The case studies hint that specific changes in regulations played a role for the emergence or absence of bubbles, yet these regulations might not be appropriately covered by standard quantitative indicators for financial market (de-)regulation. 1 HTW Berlin, [email protected] 2 HTW Berlin, [email protected] 3 HTW Berlin, [email protected] 4 This research project is funded by the Macroeconomic Policy Institute of the Hans-Böckler-Foundation. We are grateful for the financial support. What causes housing bubbles? A theoretical and empirical inquiry1 Heike Joebges,2 Sebastian Dullien,3 Alejandro Márquez-Velázquez4 November 2015 Study for the Macroeconomic Policy Institute, Hans-Böckler-Foundation, Düsseldorf 1 This research project is funded by the Macroeconomic Policy Institute of the Hans-Böckler-Foundation. We are grateful for the financial support. 2 HTW Berlin, [email protected] 3 HTW Berlin, [email protected] 4 HTW Berlin, [email protected] Table of Contents 1 Introduction ................................................................................................................................. 7 2 Theoretical Literature Review .................................................................................................... 9 2.1 Defining a Housing Bubble: Deviation from the “fundamental” value ...................................10 2.2 Theoretical Bubble Models ................................................................................................... 17 2.2.1 First Generation Rational Expectations Models ........................................................17 2.2.2 Second Generation Rational Expectations Models ...................................................17 2.2.3 Behavioral Bubble Models .........................................................................................19 2.3 The Role of Monetary Policy, the Saving Glut and Financial Regulation within the Bubble Models ...................................................................................................................... 21 2.4 Conclusion ............................................................................................................................23 3 Empirical Literature Review of Cross-Country Studies .........................................................24 3.1 Studies focusing on house price levels ................................................................................24 3.2 Measuring Housing Bubbles ................................................................................................ 28 3.3 Bubbles and Monetary Policy ............................................................................................... 30 3.4 Conclusions .......................................................................................................................... 32 4 Time series cross section evidence ........................................................................................33 4.1 Data ...................................................................................................................................... 35 4.1.1 Endogenous variable: ...............................................................................................35 4.1.2 Explanatory variables ...............................................................................................40 4.2 Estimation approach ............................................................................................................. 42 4.3 Estimation results ................................................................................................................. 45 4.4 Conclusion ............................................................................................................................49 5 Housing Markets, Monetary Policy and Financial Developments: Three Case Studies ..... 51 5.1 A bubble under lax monetary policy: The House price bubble in the United States in the 2000s .......................................................................................................................... 52 5.1.1 Description of house price developments .................................................................52 5.1.2 Structure of the housing market and relevance of mortgage loans .......................... 53 5.1.3 Description of monetary policy ..................................................................................55 5.1.4 Changes in regulatory environment ..........................................................................57 5.1.5 Conclusions from the case study of the 2000s US house price bubble .................... 58 5.2 A bubble without lax monetary policy: The house price bubble in the United Kingdom in the late 1990s/early 2000s ...............................................................................................59 5.2.1 Description of house price developments .................................................................59 5.2.2 Structure of the housing market ................................................................................61 5.2.3 Description of monetary policy ..................................................................................63 5.2.4 Regulatory financial environment and financial innovations ..................................... 64 2 5.2.5 Conclusions from the UK case study ........................................................................67 5.3 Lax monetary policy without a housing bubble: The Austrian real estate market in the 2000s .......................................................................................................................... 68 5.3.1 House price developments .......................................................................................68 5.3.2 Housing finance ........................................................................................................70 5.3.3 Description of monetary policy ..................................................................................72 5.3.4 Public Sector Involvement and Housing Regulation .................................................73
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