Detection and Prediction of House Price Bubbles: Evidence from a New City

Abstract

In the early stages of growth of a city, housing market fundamentals are uncertain. This could attract speculative investors as well as actual housing demand. Sejong is a recently built administrative city in South Korea. Most government departments and public agencies have moved into it, while others are in the process of moving or plan to do so. In Sejong, a drastic escalation in house prices has been noted over the last few years, but at the same time, the number of vacant housing units has increased. Using the present value model, lease-price ratio, and log-periodic power law, this study examines the bubbles in the Sejong housing market. The analysis results indicate that (i) there are significant house price bubbles, (ii) the bubbles are driven by speculative investment, and (iii) the bubbles are likely to burst earlier here than in other cities. The approach in this study can be applied to identifying pricing bubbles in other cities.