Real estate bubble evaluation models. real estate bubble in Lithuania
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Abstract
Analysis of the changes in housing prices showed that increases and declines of the prices became very sudden and difficult to predict; this is the main issue of this work. Comparing Lithuania to other countries of Western Europe or USA, the real estate market with private ownership is young and does not have a history that could provide more information about price fluctuation.
The purpose of this work is to determine the „housing bubble“ concept, to define its types, indicators, valuation methods and to determine what kind of a housing bubble was in Lithuania in 2000-2008.
The concept of “housing bubble” can be defined as increase and decline of the housing prices to the same level within a certain period of time. The fundamental factors do not apply, because there is no precise indication of what the factors are fundamental, and what are not. While using the concept „housing bubble“ or researching it, it is essential to determine the factors or indicators related to it and why the bubble could burst.
Many scientists present different housing bubble types, however, all of them have some similarities. The most practical is to distinguish the bubbles into following types: purely speculative bubble, irrational expectations bubble, and irrational institutions bubble.
The indicators of the housing bubble could be distinguished to eight main groups: cost / income ratio, housing costs, housing supply, buyer expectations on price, the buyer’s impatience and financial risk taking, the credit market, speculative behavior and the ratio of rental and housing indicators. The main problem is that not all indicators can display the impending housing bubble, and none of them is 100% reliable. These indicators represent the main indicators‘ groups of which you can derive many other indicators.
There are three main methods of housing bubble valuation, which are most commonly used to evaluate bubbles: the fundamental factors (which have an impact to housing supply and demand) method, price to rent method, and price to income method. All these methods can be modified and improved in order to evaluate the housing bubble more precisely. We offer to use the method that is the best to correspond to the housing market in the country.
This article evaluates the housing price bubble in Lithuania during 2000-2008 period, by using modified price to income method. It was identified that there was a dramatic increase of housing prices, comparing to an increase of wages. In the second quarter of 2007, the price bubble raised up to 50% of housing value. This big increase and forthcoming decline of prices can make a strong impact on the economy of the country. In the future we must analyze these price variations more precisely and inform the public about possible price declines or to indicate how much wages should increase that the housing price to wages ratio would stay at historically normal level.
The purpose of this work is to determine the „housing bubble“ concept, to define its types, indicators, valuation methods and to determine what kind of a housing bubble was in Lithuania in 2000-2008.
The concept of “housing bubble” can be defined as increase and decline of the housing prices to the same level within a certain period of time. The fundamental factors do not apply, because there is no precise indication of what the factors are fundamental, and what are not. While using the concept „housing bubble“ or researching it, it is essential to determine the factors or indicators related to it and why the bubble could burst.
Many scientists present different housing bubble types, however, all of them have some similarities. The most practical is to distinguish the bubbles into following types: purely speculative bubble, irrational expectations bubble, and irrational institutions bubble.
The indicators of the housing bubble could be distinguished to eight main groups: cost / income ratio, housing costs, housing supply, buyer expectations on price, the buyer’s impatience and financial risk taking, the credit market, speculative behavior and the ratio of rental and housing indicators. The main problem is that not all indicators can display the impending housing bubble, and none of them is 100% reliable. These indicators represent the main indicators‘ groups of which you can derive many other indicators.
There are three main methods of housing bubble valuation, which are most commonly used to evaluate bubbles: the fundamental factors (which have an impact to housing supply and demand) method, price to rent method, and price to income method. All these methods can be modified and improved in order to evaluate the housing bubble more precisely. We offer to use the method that is the best to correspond to the housing market in the country.
This article evaluates the housing price bubble in Lithuania during 2000-2008 period, by using modified price to income method. It was identified that there was a dramatic increase of housing prices, comparing to an increase of wages. In the second quarter of 2007, the price bubble raised up to 50% of housing value. This big increase and forthcoming decline of prices can make a strong impact on the economy of the country. In the future we must analyze these price variations more precisely and inform the public about possible price declines or to indicate how much wages should increase that the housing price to wages ratio would stay at historically normal level.
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Authors retain copyright of their work, with first publication rights granted to the Association for Learning Technology.
Authors retain copyright of their work, with first publication rights granted to the Association for Learning Technology.
