Housing bubbles tend to be among the asset bubbles with the largest effect on the real economy because they are credit-fueled,[1],and a large number of households participate and not just investors, and because the wealth effect from housing tends to be larger than for other types of financial assets.
[2] Most research papers on housing bubbles use standard asset price definitions.
His point is that traditional definitions such as that of Stiglitz (1990),[3] in which bubbles are proposed as arising from prices not being determined by fundamentals, are problematic.
This is primarily because the concept "fundamentals" is vague, but also because these type of nominal definitions typically do not refer to a bubble episode as a whole—with both an increase and a decrease of the price.
First, there is the finance-based method, where the house price equals the discounted future rents.
The second approach is to compare the costs of building new dwellings against the actual house prices today.
If demand is low, this leads to lower house prices and less construction of new homes.
Glaeser and Gyourko (2005)[13] point out that the housing market is characterized by a kinked supply curve that is highly elastic when prices are at or above construction costs.
Thus, house prices in slow or negative demand growth markets are capped by construction costs.
The last approach by Mayer (2011)[12] is to utilize a combination of house price affordability to derive an equilibrium model.