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from the linear trend) was also larger in the 2000s. Indeed, the average bubble was almost three times larger in the bubble episodes of the late 2000s than during the 1990s (109 over 39).6 Therefore, it seems that both the likelihood of having a global housing bubble and the size of the bubble were increasing over time. These results are consistent with the findings of Pavlidis et al. (2016), which use time-series techniques to identify housing bubble episodes in a panel of 22 countries between 1975 and 2013. They also document an exceptional emergence and synchronization of housing bubble episodes in the late 2000s.7 In the next chapters, we will offer a possible explanation for this increasing trend.
References Brunnermeier, M. K. (2009). Bubbles. In L. Blume & S. Durlauf (Eds.), New Palgrave Dictionary of Economics. Basingstoke: Palgrave Macmillan. Giglio, S., Maggiori, M., & Stroebel, J. (2016). No-Bubble Condition: ModelFree Tests in Housing Markets. Econometrica, 84, 1047–1091. Jordà, Ò., Schularick, M., & Taylor, A. M. (2015). Leveraged Bubbles. Journal of Monetary Economics, 76, S1–S20. Kindleberger, C. P., & Aliber, R. (2005). Manias, Panics, and Crashes: A History of Financial Crises (5th ed.). Hoboken: Wiley. ISBN 0-471-46714-6. Knoll, K., Schularick, M., & Steger, T. (2017). No Price Like Home: Global House Prices, 1870–2012. American Economic Review, 107(2), 331–353.
6 The size of the bubble is computed as a simple average of the deviation from the trend for the countries with the housing bubble indicator equal to one. 7 Other economists have attempted to identify housing bubbles. In an important empirical contribution, Giglio et al. (2016) analyze the housing boom in London in the late 2000s. As we will see in the next chapter, classical rational bubbles can only emerge in infinite time horizon models. The authors take advantage of a peculiar feature of the London housing market to compare the price of an “identical” house under two types of ownership: (i) leaseholds (ownership expires in finite time, often more than 700 years) and (ii) freeholds (there is no expiration date). Thus, theoretically, rational bubbles could only emerge in houses under freehold ownership. Since they do not find a statistically significant difference between the prices of houses under the two types of ownership, they conclude that rational bubbles alone cannot explain the recent housing boom in London. The first thing to remark is that the authors do not rule out the presence of a housing bubble in London. Moreover, although they perform a very interesting exercise, we do not think that their findings rule out rational bubbles as drivers of housing booms. In other words, as we describe in the rest of the book, features of both rational and irrational bubbles seem relevant to describe the recent housing booms.
