Browsing by Subject "ADF test"

This thesis investigates whether the Finnish house market experienced a housing bubble through 2015 to 2021. During the period in question, the world suffered the global pandemic, Covid-19, which influenced fluctuations in different markets such as labor, housing, and financial. Study of this thesis focuses on the house market of Finland as a whole, divided between old and new apartment types with data spreading quarterly from 2015 to 2021. Beginning with summarizing the various definitions of a bubble made in the literature and studies regarding housing bubbles, this thesis bases its study on the most commonly used definition of bubble presented as deviation from economic fundamentals. After the introduction and definition discussion, this thesis introduces the theoretical framework and analysis of the three conventional ratios of house price dynamics from the aforementioned literature. These ratios being the price-to-income ratio, price-to-rent ratio, and imputed-to-actual rent ratio. The imputed-to-actual rent ratio includes the user cost formula which is modified to fit the Finnish house market landscape. The results from the ratio analysis show only weak or non-existent proof of a bubble based on the severity when compared to results from the literature of other markets. Between apartment types, the price increase has been considerably higher for new type than for old implying overvaluation for new apartments, which can be seen throughout the ratio analysis as well. Final part includes the stationarity and the cointegration tests. The ADF test on stationarity is conducted on the first two ratios and results show that the price-to-income ratio is stationary for old type but non-stationary for new type. When the ADF test is conducted on first difference to validate the result, both types show stationarity, while for the price-to-rent ratio, both types show non-stationarity and on the first difference, old type stays non-stationary at 90% significance. Lastly, the cointegration model for testing if the house prices are deviating from the economic fundamentals is constructed. Results of cointegration test show that house prices cannot be explained by the set of economic fundamentals except household income since test statistic does not reject the null hypothesis of no cointegration. The conclusion outlines that although some of the results are showing towards a bubble, the evidence is too weak and insignificant to prove it.