Indicators for Bubble Formation in Housing Markets

Abstract: It widely is assumed that property markets can be predicted and to be able to make forecasts, concerning future housing prices, a number of different indicators are used. But if it possible to know the future today, why do we still experience bubbles in housing markets? To answer this question the reliability of four of the most commonly used indicators were tested for the time period between 2000 and 2010. To evaluate the indicators predicting power the development in, Germany, Sweden, Spain and the UK was studied. Germany and Sweden did not experience a correction during the most recent financial crises, while Spain and the UK did. If the evaluated indicators would be good predictors of future developments, it should have been possible to see differences in the attained values prior to the crises and it should have been easy to forecast that prices would fall in the UK and Spain and that they would be fairly stable in Germany and continue to increase in Sweden. The results from this study do not support the statement, that property prices can be forecasted, but, on the contrary, indicates that the investigated indicators have very limited predictive power in forecasting future price developments in housing markets. The result also show that variable rate mortgages can be expected to play a smoothing effect on property prices during economic cycles.