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Is There a Real Estate Bubble in the Czech Republic?
Petr ZemčíkMILANO, ERES 2010
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Real Estate Price Indexes in Central and Eastern Europe
Year Bulgaria CR Est. Hungary Latvia SR
1997 42
1998 50
1999 50
2000 87 51
2001 89 78 68 88
2002 89 84 89 90 98 72
2003 100 100 100 100 100 100
2004 148 116 128 109 108 115
2005 202 119 167 110 137 104
2006 231 130 254 109 271 121
2007 298 173 280 111 150
2008 373 220 259 112
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Real Estate Bubbles
Discrepancy between property prices and model implied prices reflecting fundamental factors.
Widely used models:
- Supply-demand model. Gallin (2006), Mikhed and Zemčík (2009, JHE)
- Present-value model. Rent is the only factor. Campbell and Shiller (1987), Wang (2000), Mikhed and Zemčík (2009, JREFE)
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Panel data tests
Unit roots - Im, Pesaran, and Shin (2003), Pesaran (2007)
Regional correlation – Pesaran (2004) Applications, US data – Malpezzi (1999), Gallin
(2006), Mikhed and Zemčík (2009 JHE, JREFE) Granger causality tests – Hurlin (2004), Hurlin
and Venet (2004), Arellano and Bond (1991)
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Present-value model
stationary-non and stationary-non :4 Case
stationary and stationary-non :3 Case
stationary-non and stationary :2 Case
stationary and stationary :1 Case
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Econometric Methodology
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Apartment prices, 335 regions, Czech Republic
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Rents, 335 regions, Czech Republic
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Price-to-rent ratios, 335 regions, Czech Republic
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Apartment prices, 46 Prague districts
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Rents, 46 Prague districts
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Price-to-rent ratios, 46 Prague districts
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Panel data unit root tests
Test Specification Prices Rents P/R
Prague
CIPS Int., trend, CADF(0) -2.74** -2.11 -2.00
CIPS Int., trend, CADF(1) -2.90*** -3.09*** -2.35
IPS Int., trend, ADF(1) 1.00 -2.66*** -1.13
Czech Rep.
CIPS No int., no trend, CADF(0) -1.44* -0.92 -1.07
CIPS No int., no trend, CADF(1) -1.56** -0.83 -1.12
CIPS Int., no trend, CADF(0) -2.61** -1.42 -1.00
CIPS Int., no trend, CADF(1) -3.03*** -2.03 -1.56
CIPS Int., trend, CADF(0) -2.51 -1.22 -2.59
IPS Int., no trend, ADF(1) 16.28 7.12 14.41
IPS Int., trend, ADF(1) 1.84 -14.16 7.56
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Results
Apartment prices both in the Czech Republic overall and in its capital are only slightly overvalued.
Changes in prices are helpful in predicting changes in rents and vice versa.
Application in countries with large rental markets: e.g. majority of original EU members plus CR and Poland