Detecting Housing Bubbles Throughthe Assessmentof House Price Deviations in Bulgaria

This article attempts to assess the real deviations of house prices in Bulgaria from their long-term equilibrium levels. Moreover, we research the characteristics of house price bubbles on a global scale and introduce diagnostic tools for their identification on a local level. We compare the current price trends in Bulgaria versus those that already took place during the last documented house bubble that burst in 2008. For assessment of the price deviations, we evaluate a vector error correction model (VECM) that projects a curve for the equilibrium levels of the national house price index (HPI) for the last two decades. Hence, we could determine whether the domestic real estate market is overheating or cooling down. The model itself is built upon the interactions of the HPI with a few macro-financial indicators that as we have found out exercise influence on house prices in Bulgaria. The main conclusion is that despite the serious growth of house prices in Bulgaria during the recent years and the common public perception that the real estate market is overheating, no convincing evidence was found to prove the hypothesis of an inflating bubble in national terms.