Testing for real estate bubbles

This chapter provides a review of the recent literature on bubble testing in real estate markets. Starting from a theoretical overview of the specificities of real estate assets we assess the latest econometric methodology to detect the periods when a real estate bubble is present. In an illustration for the case of Japan's house prices over four decades, we focus on a two-step econometric strategy to first filter out the fundamental component in the price-to-rent ratio and then test for the possible explosive character of the, non-fundamental, residual. Such a strategy enables researchers both to avoid misleading signals about spurious bubbles, and to detect bubbles which may be hidden when focusing only on the price-to-rent ratio.