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Most previous studies have reported that housing prices diffuse from the city centre to surrounding areas. However, these studies have overlooked the fact that housing prices comprise fundamental and bubble prices. We investigated whether bubble prices also diffuse from the city centre to suburbs and whether fundamental or bubble prices promote housing price diffusion. We focused on the movement of housing bubbles from the city centre to the suburbs. Using data for the Taipei metropolitan area from 1973 to 2014 for empirical analysis, our state-space model estimates statistically significant fundamental and bubble prices in Taipei City (city centre) and New Taipei City (suburbs). Engle–Granger cointegration test results reveal that the housing and bubble prices of the two cities are cointegrated; however, fundamental prices are not. F statistics reveal that the Granger causality of bubble prices (the central city Granger causing changes in the suburbs) is more significant and powerful than that of the fundamental prices. Therefore, we demonstrate that housing bubbles force housing price diffusion. In addition, when bubble prices spread from the city centre to the suburbs, the housing bubble in the suburbs is larger than that in the city centre, implying that the suburbs have greater potential for a bubble burst crisis called the bubble contagion. Authorities should pay more attention to the bubble contagion and must address the problem of high housing prices in the suburbs to prevent this bubble from bursting

Asset bubble is a popular topic in recent years, and there are many literatures to study if there are housing bubble exist in the housing market or what are the determinate factors to affect the housing market. Hence the housing price are composed of fundamental value and bubble, the definition of fundamental will affect the results of housing bubble. However, few paper to analysis the relationship between fundamental and housing bubble. Therefore, in this study we investigate the influence of different fundamental on housing bubble.We used the rent, household income and macroeconomic variables to build the fundamental model, respectively. Through the consistent State-Space model to measure the housing bubble from the first quarter of 1981 to the second quarter of 2012Q2 in Taipei City. Our result shows that when housing price boom, these three fundamental model have the consistent performance, in other word, the bubble size almost the same. However, when housing market recession, the trend of bubble prices are significant differences. Where, the bubble price calculated from rent fundamental almost are still positive, the bubble price calculated from household income fundamental are significant negative, and the bubble price calculated from macroeconomic variables fundamental are stable fluctuation. We think that the fundamental is composed of macroeconomic variable is in line with the current situation.

In recent years, housing booms have caused ghost town phenomena in many cities such as Dublin, Madrid, Dubai, etc. This paper derives a theoretical model to illustrate how activities of producers and rent seekers affect housing price booms in city centers and surrounding areas due to overdevelopment in urban growth. Because activities of producers and rent seekers are untraceable, we propose an innovative definition that housing fundamentals and bubbles are proxies for activities of producers and rent seekers respectively. We use data on the Taipei metropolitan area from 1973 to 2012 for empirical analysis. Our results show that housing price changes diffuse from the city center to the suburbs and that changes in the city center housing bubble cause price movements in the suburbs. The housing market acts as a reward system for rent seeking activities, thereby influencing investment incentives. Interestingly, the housing bubble size in the suburbs is larger than that in the city center, verifying the prediction in theory that activities of rent seekers contribute to the bubble contagion. Finally, the current vacancy rate in the suburbs is higher than that in the city center, suggesting that bubble contagion leads to overdevelopment, which then results in the appearance of so-called ghost areas.