Using data for six metropolitan housing markets in three countries, this article provides a comparison of methods used to measure house price bubbles. We use an asset pricing approach to identify bubble periods retrospectively and then compare those results with results produced by six other methods. We also apply the various methods recursively to assess their ability to identify bubbles as they form. In view of the complexity of the asset pricing approach, we conclude that a simple price-rent ratio measure is a reliable method both ex post and in real time. Our results have important policy implications because a reliable signal that a bubble is forming could be used to avoid further house price increases.
Bibliographical noteWe thank John Clapp, Martijn Dröes, Mika Kortelainen, and Song Shi for helpful comments. Financial support from the Academy of Finland, the OP‐Pohjola Group Research Foundation, the Kluuvi Foundation, and the Emil Aaltonen Foundation is gratefully acknowledged.