Is There a Real Estate Bubble in the Czech Republic? Petr Zemčík MILANO, ERES 2010

Real Estate Price Indexes in Central and Eastern Europe YearBulgariaCREst.HungaryLatviaSR

Real Estate Bubbles  Discrepancy between property prices and model implied prices reflecting fundamental factors.  Widely used models: - Supply-demand model. Gallin (2006), Mikhed and Zemčík (2009, JHE) -Present-value model. Rent is the only factor. Campbell and Shiller (1987), Wang (2000), Mikhed and Zemčík (2009, JREFE)

Panel data tests  Unit roots - Im, Pesaran, and Shin (2003), Pesaran (2007)  Regional correlation – Pesaran (2004)  Applications, US data – Malpezzi (1999), Gallin (2006), Mikhed and Zemčík (2009 JHE, JREFE)  Granger causality tests – Hurlin (2004), Hurlin and Venet (2004), Arellano and Bond (1991)

Present-value model

Econometric Methodology

Apartment prices, 335 regions, Czech Republic

Rents, 335 regions, Czech Republic

Price-to-rent ratios, 335 regions, Czech Republic

Apartment prices, 46 Prague districts

Rents, 46 Prague districts

Price-to-rent ratios, 46 Prague districts

Panel data unit root tests TestSpecificationPricesRentsP/R Prague CIPSInt., trend, CADF(0)-2.74** CIPSInt., trend, CADF(1)-2.90***-3.09***-2.35 IPSInt., trend, ADF(1) ***-1.13 Czech Rep. CIPSNo int., no trend, CADF(0)-1.44* CIPSNo int., no trend, CADF(1)-1.56** CIPSInt., no trend, CADF(0)-2.61**-1.42 CIPSInt., no trend, CADF(1)-3.03*** CIPSInt., trend, CADF(0) IPSInt., no trend, ADF(1) IPSInt., trend, ADF(1)

Results  Apartment prices both in the Czech Republic overall and in its capital are only slightly overvalued.  Changes in prices are helpful in predicting changes in rents and vice versa.  Application in countries with large rental markets: e.g. majority of original EU members plus CR and Poland