Testing for Bubbles in Real Estate Price Cycles

Journal of Property Research, Vol. 18, No. 4, pp. 341-346, 2001

Cass Business School Research Paper

Posted: 5 Dec 2004

See all articles by Chris Brooks

Chris Brooks

University of Bristol - School of Economics, Finance and Management

Apostolos Katsaris

CdR Capital Ltd

Tony McGough

City University London - Sir John Cass Business School

Sotiris Tsolacos

University of Reading - Centre for Spatial and Real Estate Economics (CSpREE)

Abstract

This paper investigates whether the prices of UK equity-traded property stocks over the past fifteen years contain evidence of a speculative bubble. Speculative bubbles are generated when investors include the expectation of the future price in their information set. In the presence of speculative bubbles, positive expected bubble returns will lead to increased demand and will thus force prices to diverge from their fundamental value. The present analysis draws upon the methodologies adopted in various studies examining price bubbles in the general stock market. Fundamental values are generated using two models: the dividend discount and the Gordon growth. Variance bounds tests are then applied to test for bubbles in UK property asset prices. Finally, cointegration analysis is conducted to provide further evidence on the presence of bubbles. Evidence of the existence of bubbles is found but these appear to be transitory and concentrated in the mid-to-late 1990s. Investors in property stocks should be aware that in periods when bubbles are present the market does not move on the basis of the fundamentals and abrupt price corrections can occur.

Suggested Citation

Brooks, Chris and Katsaris, Apostolos and McGough, Tony and Tsolacos, Sotiris, Testing for Bubbles in Real Estate Price Cycles. Journal of Property Research, Vol. 18, No. 4, pp. 341-346, 2001, Cass Business School Research Paper, Available at SSRN: https://ssrn.com/abstract=626703

Chris Brooks (Contact Author)

University of Bristol - School of Economics, Finance and Management ( email )

School of Accounting and Finance
15-19 Tyndalls Park Road
Bristol, BS8 1PQ
United Kingdom

Apostolos Katsaris

CdR Capital Ltd ( email )

11 Charles II Street
London, SW1Y 4QU
United Kingdom
2038619900 (Phone)
SW1Y 4QU (Fax)

Tony McGough

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Sotiris Tsolacos

University of Reading - Centre for Spatial and Real Estate Economics (CSpREE) ( email )

Department of Economics Whiteknights P.O. Box 219
Reading, RG6 6AH
United Kingdom
44-0118-931-823 (Phone)
44-118-931-6533 (Fax)

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