House prices, bubbles and critical times

Abstract

At the early stage of the 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 as capital city of South Korea and functions similar to Washington DC in the US. Most government departments and public agencies have moved while some are still moving in or plan to do so. In Sejong, a drastic escalation of home 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, rent-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 price bubbles, (ii) the bubbles are driven by speculative investments, and (iii) the bubbles are likely to burst earlier than in other cities. The approach in this study can be applied to identify pricing bubbles in other new city.