House Prices, Non-Fundamental Components and Interstate Spillovers: The Australian Experience

52 Pages Posted: 24 Aug 2009 Last revised: 15 Sep 2010

See all articles by Greg Costello

Greg Costello

Curtin University - Centre for Research in Applied Economics

Patricia Fraser

Curtin University of Technology - Curtin Business School - Bentley Campus; University of Aberdeen - Business School

Nicolaas Groenewold

The University of Western Australia - Department of Economics

Date Written: November 16, 2009

Abstract

Using Australian capital city data from 1984Q3-2008Q2, this paper utilizes a dynamic present value model within a VAR framework to construct fundamental 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 c. 2000. In general NSW is relatively more susceptible to spillovers transmitted from other states while WA is least affected.

Keywords: house prices, present value model, house price fundamentals, house price-income ratio, VAR/VEC modelling

JEL Classification: R21, R31, J12

Suggested Citation

Costello, Greg and Fraser, Patricia and Groenewold, Nicolaas, House Prices, Non-Fundamental Components and Interstate Spillovers: The Australian Experience (November 16, 2009). 22nd Australasian Finance and Banking Conference 2009. Available at SSRN: https://ssrn.com/abstract=1460386 or http://dx.doi.org/10.2139/ssrn.1460386

Greg Costello (Contact Author)

Curtin University - Centre for Research in Applied Economics ( email )

GPO Box U1987
Perth, Western Australia 6845
Australia

Patricia Fraser

Curtin University of Technology - Curtin Business School - Bentley Campus ( email )

GPO Box U1987
Perth WA 6845
Australia

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom

Nicolaas Groenewold

The University of Western Australia - Department of Economics ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia
+ 61 8 9380 3345 (Phone)
+ 61 8 9380 1016 (Fax)

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