Working Paper: NBER ID: w20154
Authors: Stefano Giglio; Matteo Maggiori; Johannes Stroebel
Abstract: We test for the existence of housing bubbles associated with a failure of the transversality condition that requires the present value of payments occurring infinitely far in the future to be zero. The most prominent such bubble is the classic rational bubble. We study housing markets in the U.K. and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are finitematurity, pre-paid, and tradable ownership contracts with maturities often exceeding 700 years. Freeholds are infinite-maturity ownership contracts. The price difference between leaseholds with extremely-long maturities and freeholds reflects the present value of a claim to the freehold after leasehold expiry, and is thus a direct empirical measure of the transversality condition. We estimate this price difference, and find no evidence for failures of the transversality condition in housing markets in the U.K. and Singapore, even during periods when a sizeable bubble was regularly thought to be present.
Keywords: housing bubbles; transversality condition; model-free tests; housing markets
JEL Codes: E44; G02; G11; G12; R30; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of significant price differences between leaseholds with extremely long maturities and freeholds (R31) | absence of classic rational bubbles (E32) |
| absence of significant price differences between leaseholds with extremely long maturities and freeholds (R31) | bubble claim b_t is effectively zero (E32) |
| absence of significant price differences (D41) | classic rational bubble does not account for observed price movements (E32) |
| hedonic regression analysis controlling for property characteristics (R21) | no significant difference in prices across leaseholds and freeholds (R21) |
| control for potential confounders using hedonic regression techniques (C29) | validity of findings against various institutional features (C90) |
| price of extremely long leaseholds is aligned with that of freeholds (R31) | classic rational bubble is not present (E32) |