BUBBLEMETRICS: TESTING OF BUBBLES IN THE SINGAPORE PRIVATE RESIDENTIAL MARKET

Abstract

The primary interest of this study is to test for the presence of property bubbles in the recent housing boom of the Singapore’s private residential market. Currently, there is little or no studies made to quantitatively test for the property bubbles in Singapore. The previous studies in the context of Singapore are mainly confined to the behavioural study of the market participants, whereby surveys are undertaken to determine the various household perceptions on the housing price, and the non-fundamental factors that affect their perceptions on house prices. Distinguished from the previous studies, this paper aims to bridge the existing literature gap by adopting well-executed econometric model to test for the property bubbles in Singapore. The model adopted in this study is the Abraham and Hendershott (1996) model, which will be estimated by the ordinary least square regression method. In order to control for the bubble effect experienced in the previous housing peaks in Singapore, dummy variables are also introduced into the empirical model for better estimation of the bubbles. In this study, quarterly time series data for the independent and dependent variables are collected for a 19-year period from 1988 to 2007. Overall, this study has shown that there is significant presence of a property bubble in the current housing boom, which implies that the current level of price may not be sustainable. The bubble may very likely burst in the event of any triggering factor such as rising interest rates, corrections in the stock market, or a global economic downturn. In effect, the fall in price will be more severe when the bubble is larger. In addition, the finding also implies that future studies on modeling the housing price dynamics of Singapore need to account for the bubble effect in their specification, given the significant amount of bubble found present in the empirical model.