Detecting rational bubbles in the residential housing markets of Hong Kong

Abstract

This paper attempts to conduct an empirical study for detecting misspecification errors and rational bubbles in the residential housing markets of Hong Kong. We focus on a fundamental model that defines market fundamental price as a sum of the expected present value of rental income, discounted at a constant rate of return. Testable implications for detecting misspecification errors and/or price bubbles are explored through the flow and stock approaches. In addition, the paper attempts to identify the amount of misspecification and bubble components in the property price data of Hong Kong.