The International Housing Observatory is a collaborative project of the Federal Reserve Bank of
Dallas, the
Economics Department at Lancaster University Management School (LUMS), and the Department of
Fundamentals of Economic Analysis (FAE) at the
University of Alicante (UA).
It provides real-time monitoring of real estate markets across the world. We calculate
exuberance data using real house prices(or conventional house-price-to-income ratios) from the
latest
release available
of the International House Price
Database,
compiled by the Federal Reserve Bank of
Dallas.
The exuberance indicators are computed using statistical techniques pioneered by Yale economist
Peter C. B.
Phillips and his co-authors—two recursive (right-tailed) unit root tests called the Supremum
Augmented
Dickey-Fuller (SADF) and Generalized SADF (GSADF) tests. These statistics detect and date periods
of
exuberance, typically when house prices (or house prices relative to personal disposable income per
capita)
display explosive behavior.
Explosive or exuberant behavior may occur when real house prices become detached from housing
fundamentals and the current strength of real house price appreciation is instead supported largely
on the
belief of robust future price increases. When exuberant housing market episodes (booms) are deviant
from
housing fundamentals for long periods of time, housing markets become more vulnerable
and at risk of large corrections (busts).
Thus, the exuberance indicators provide a useful signal of emerging misalignments and are powerful
tools for early warning and monitoring international real estate markets.
