An Examination of Housing Bubble and Speculation in Urban Areas of Iran

In this paper we have examined housing bubble and speculation in urban areas of Iran. For this purpose, we have designed a suitable model to identify factors determining housing prices in Iran and then, we have used GMM method to estimate the model for quarterly data in the period of 1996:2 to 2011:1. The results show that several variables including prices in previous periods, the rate of return in other markets (taking adjusted consumer price index as a proxy), housing supply (for which, we have used the number of construction permits as proxy), population growth and housing costs has had statistically significant impact on house prices in Iran. Contrary to our expectations, the coefficient of national income (GDP) variable has not been statistically significant. Taking prices of previous year as Proxy of speculation demand, while taking return in other markets, housing supply, changes in population and housing costs as proxy for consumption demand, we found that the share of speculating demand for housing has been 6.8 times higher than demand for consumption during the period under study. When we extend our sample up to 2012 and defining house price bubble as deviation of short term price from its long term trends, the result shows that in the three last quarters of year 2012, price bubble in housing of Iran was 17/8, 26/3 and 56/6 percent respectively for these quarters, which we can interpret them as the impact of psychological expectations and short term fluctuations.