Determinants of the Probability of Boom-Bust Cycles in the Housing Market

In this study, we first identify boom and bust cycles in house real prices, defined as major and persistent deviations from long-term trends, and then analyze the factors affecting the cycles. To identify the cycles, we follow the dating approach known as triangular methodology initially proposed by Harding and Pagan (2002) and used by many researchers, such as Jaeger & Schuknecht (2007) and Agnello & Schuknecht (2009). We also apply the Probit model to estimate the determinants of these cycles. The Probit model makes it possible to evaluate the marginal effect of each driving factors of housing prices on boom-bust probabilities. Results suggest that the growth of real liquidity balances has the largest and statistically significant marginal effects on the probabilities of booms in housing market. This indicates that the expansionary monetary policy might lead to sharp booms in housing market through liquidity and credit expansion.