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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