Detecting Imbalances in House Prices: What Goes Up Must Come Down?

Abstract

I suggest a toolkit of four bubble-detection methods that can be used to monitor house price developments. These methods are applied to US, Finnish and Norwegian data. For the US, all measures unanimously suggest a bubble in the early to mid 2000s, whereas current US house prices are found to be aligned with economic fundamentals. One of the measures indicates imbalances in Finland, while there are no signs of a bubble in Norway. I find that large parts of the US house price bubble can be explained by the sharp increase in capital inflows and the extension of loans to the subprime mortgage market.