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Article

Prosperity or Real Estate Bubble? Exuberance Probability Index of Real Housing Prices in Chile

1
Gerencia de Estudios, Cámara Chilena de la Construcción, Santiago 7560860, Chile
2
Instituto de Estadística, Facultad de Ciencias, Universidad de Valparaíso, Valparaíso 2360102, Chile
*
Author to whom correspondence should be addressed.
Academic Editors: Peng-Yeng Yin and Sabri Boubaker
Int. J. Financial Stud. 2021, 9(3), 51; https://doi.org/10.3390/ijfs9030051
Received: 19 August 2021 / Revised: 14 September 2021 / Accepted: 16 September 2021 / Published: 18 September 2021
(This article belongs to the Special Issue Financial Issues of Emerging Industry)
In this paper, we approached the concept of real estate bubble, analyzing the risk its bursting could generate for the Chilean financial market. Specifically, we analyzed the relationship between real housing prices, the economic activity index, and mortgage interest rates denominated in inflation-linked units from 1994 to 2020. The analysis was based on a second order Markov switching model with the predetermined variables mentioned later, whose parameters were obtained through the expectation–maximization algorithm. Then, we built a probability index as early warning indicator for potential imbalances in the real estate price that could put financial market stability at risk. The indicator is important to evaluate economic policy calibrations in time. A main finding was that the real housing price had a non-linear relationship with economic activity and the mortgage interest rate. Therefore, the evolution of the real estate price has been consistent with fundamental macroeconomic variables, even under a high growth regime, with increases above 12% per year. About 92% of housing price variability derived from changing macrofinancial conditions, suggesting a low margin of speculative behavior. View Full-Text
Keywords: real housing prices; interest rate; policy decision making; Markov switching; expectation–maximization algorithm real housing prices; interest rate; policy decision making; Markov switching; expectation–maximization algorithm
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MDPI and ACS Style

Idrovo-Aguirre, B.J.; Lozano, F.J.; Contreras-Reyes, J.E. Prosperity or Real Estate Bubble? Exuberance Probability Index of Real Housing Prices in Chile. Int. J. Financial Stud. 2021, 9, 51. https://doi.org/10.3390/ijfs9030051

AMA Style

Idrovo-Aguirre BJ, Lozano FJ, Contreras-Reyes JE. Prosperity or Real Estate Bubble? Exuberance Probability Index of Real Housing Prices in Chile. International Journal of Financial Studies. 2021; 9(3):51. https://doi.org/10.3390/ijfs9030051

Chicago/Turabian Style

Idrovo-Aguirre, Byron J., Francisco J. Lozano, and Javier E. Contreras-Reyes. 2021. "Prosperity or Real Estate Bubble? Exuberance Probability Index of Real Housing Prices in Chile" International Journal of Financial Studies 9, no. 3: 51. https://doi.org/10.3390/ijfs9030051

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