Testing for housing price bubbles in Singapore

Abstract

In this report, we compare fundamental and actual housing prices in Singapore for a period of 22 years from 1977 to 2009. We utilize a dynamic present value model to find disparities between the fundamental and actual housing prices. Attempt has been made to interpret the existence of bubble by studying the interaction between the market fundamental and actual housing prices. Time series data are tested for stationarity, cointegration and serial correlation. Subsequently, vector error correction model (VECM) is used to study the dynamics of the model and existence of a housing price bubble. Generalized impulse response analysis is also conducted to gain important insights into the system’s dynamic behavior. According to our present value model, housing prices are 5.6% higher (with an upward momentum) than their fundamental value warranted by the real disposable income.