Testing Price Bubbles of Apartment Markets: A Case of Apartments in Seoul City and Gangnam District

A bubble occurs when the price of an asset rises up beyond the normal levels of market fundamentals. This paper derives a model which separates bubble movements from underlying market fundamentals. In this framework, we build a model of apartment markets which is based on demand and supply equations and test the existence of price bubbles in Seoul and Gangnam apartment prices. We also use cointegration test in order to test price bubbles of apartment. By using data from 1987 to 2014, this paper provides a substantial evidence of price bubbles in Seoul city and Gangnam district apartments. The empirical result of this study hint some policy implications. First, policy makers should consider price bubbles phenomena as well as price volatility when they establish housing price stabilization policy. Second, consumers should react proactively to price bubbles phenomena.