The rise in house prices in Dublin: bubble, fad or just fundamentals
Maurice J. Roche, 2000
According to the author, there are two questions, observed in this research. As during the 1996-1998 period house prices in Dublin were rising dramatically, probability of housing market collapse rapidly grew. So it’s necessary to analyze if there had been real speculative bubble, fad at the market and evaluate the probability of crash to this bubble or only fundamental factors influenced the price.
Author begin with the assumption that an asset price, Pt, real or nominal., can be decomposed into two components. The first is that asset prices are driven by market fundamentals, which they call the fundamental price, Ptf. The second is that there are times when asset prices deviate away from market fundamentals, which they call the non-fundamental price, Ptnf.
Pt = Ptf + Ptnf
There are two models, which observe non-fundamental part in housing prices in literature, which are fad’s model and the stochastic bubble’s model.
Fad’s model
In the fad’s model the fundamental price is assumed to be non-stationary:
The non-fundamental price is assumed to persist but not to grow forever and therefore:
In general a proxy is used to measure the fundamental price. Such a proxy is likely to be measured with error. So the equation, which shows that the asset return is the difference between actual price and proxy for fundamentals.
Moreover, according to the model this difference is just the non-fundamental price plus a random measurement error. And we can rewrite last equation into the following form:
Then, authors use a general regime-switching model assuming that the error term is heteroscedastic and that there are two sta ...