Is There a Real Estate Bubble in the Czech Republic?

Petr ZemčíkMILANO, ERES 2010

Real Estate Price Indexes in Central and Eastern Europe

Year Bulgaria CR Est. Hungary Latvia SR

1997 42

1998 50

1999 50

2000 87 51

2001 89 78 68 88

2002 89 84 89 90 98 72

2003 100 100 100 100 100 100

2004 148 116 128 109 108 115

2005 202 119 167 110 137 104

2006 231 130 254 109 271 121

2007 298 173 280 111 150

2008 373 220 259 112

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

stationary-non and stationary-non :4 Case

stationary and stationary-non :3 Case

stationary-non and stationary :2 Case

stationary and stationary :1 Case

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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

Test Specification Prices Rents P/R

Prague

CIPS Int., trend, CADF(0) -2.74** -2.11 -2.00

CIPS Int., trend, CADF(1) -2.90*** -3.09*** -2.35

IPS Int., trend, ADF(1) 1.00 -2.66*** -1.13

Czech Rep.

CIPS No int., no trend, CADF(0) -1.44* -0.92 -1.07

CIPS No int., no trend, CADF(1) -1.56** -0.83 -1.12

CIPS Int., no trend, CADF(0) -2.61** -1.42 -1.00

CIPS Int., no trend, CADF(1) -3.03*** -2.03 -1.56

CIPS Int., trend, CADF(0) -2.51 -1.22 -2.59

IPS Int., no trend, ADF(1) 16.28 7.12 14.41

IPS Int., trend, ADF(1) 1.84 -14.16 7.56

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