Testing For Bubbles In Housing Markets: A Panel Data Approach

The authors employ recently developed cross-sectionally robust panel data tests for unit roots and cointegration to find whether house prices reflect house-related earnings. They use U.S. data for Metropolitan Statistical Areas, with house price measured by the weighted-repeated-sales index, and cash flows either by market tenant rents or estimates of a fair market rent. In their full sample periods, an error-correction model is not appropriate, i.e. there is a bubble. They then combine overlapping ten-year periods, price-rent ratios, and the panel data tests to construct a bubble indicator.