Econometrica: May 2016, Volume 84, Issue 3

No-Bubble Condition: Model-Free Tests in Housing Markets

https://doi.org/10.3982/ECTA13447
p. 1047-1091

Stefano Giglio, Matteo Maggiori, Johannes Stroebel

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 United Kingdom and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are finite‐maturity, pre‐paid, and tradeable 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 of failures of the transversality condition in housing markets in the U.K. and Singapore, even during periods when a sizable bubble was regularly thought to be present.

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Supplemental Material

Supplement to "No-Bubble Condition: Model-Free Tests in Housing Markets"

In this online appendix, we provide additional information and results.  Appendix A.1 provides more details on the data sources used in this paper.  Appendix A.2 reviews and implements existing time-series tests for classic rational bubbles.  Appendix A.3 reviews the institutional framework that regulates the relationship between leaseholders and freeholders in the U.K., focusing on characteristics that might affect the relative value of extremely-long leaseholds (with maturities of 700 years or more).  Finally, Appendix A.4 expands on some of the theoretical derivations in the paper.

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Supplement to "No-Bubble Condition: Model-Free Tests in Housing Markets"

This zip file contains the replication files for the manuscript.

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