House prices, non-fundamental components and interstate spillovers: The Australian experience

Using Australian capital city data from 1984Q3--2008Q2, this paper utilizes a dynamic present value model within a VAR framework to construct time series of house prices depicting what aggregate house prices should be given expectations of future real disposable income – the “fundamental price” – an...

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Bibliographic Details
Published in:Journal of banking & finance 2011-03, Vol.35 (3), p.653-669
Main Authors: Costello, Greg, Fraser, Patricia, Groenewold, Nicolaas
Format: Article
Language:English
Subjects:
Australia
Comparative analysis
Expectations
Federal states
Geographic location
House price fundamentals
House prices
House prices Present value model House price fundamentals House price-income ratio VAR
House price–income ratio
Housing prices
Present value
Present value model
Property
Real estate market
Residential differentiation
Studies
Time series
VAR/VEC modelling
VEC modelling
Vector-autoregressive models
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Summary:Using Australian capital city data from 1984Q3--2008Q2, this paper utilizes a dynamic present value model within a VAR framework to construct time series of house prices depicting what aggregate house prices should be given expectations of future real disposable income – the “fundamental price” – and continues by comparing capital city fundamental prices with actual prices. The extent to which revealed capital city “non-fundamental” components spillover from state to state, as well as their long-term impact is also investigated. Results provide evidence of periods of sustained deviations of house prices from values warranted by income for all state capitals with the greatest deviations arising in the NSW market and starting around 2000. In general NSW is relatively more susceptible to spillovers transmitted from other states while ACT and WA are most isolated from the rest of the country.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2010.07.035