Diagnosing and Predicting Housing Bubbles: An Application to Provincial Housing Markets in Canada

This paper proposes a methodology for diagnosing and

predicting housing bubbles before they burst. The proposal is

implemented in two steps. In step 1 we apply three innovative

stock-bubbles tests to Canada’s provincial housing markets. This

allows us to classify provinces into three categories: those that

have not experienced any; those that have experienced in the

past; and those that are currently experiencing and may also

have experienced in the past episodes of bubble-like explosive

growth in the price-rent ratio. To determine whether explosive

growth in the latter two categories of provinces is the result of

changes in fundamentals or excessive speculation, in step 2 we

use the dating chronologies for explosive growth from step 1 and

probit models to evaluate the ability of many fundamentals to

predict future bubble formation.

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