House Prices, Non-Fundamental Components and Interstate Spillovers: The Australian Experience
52 Pages Posted: 24 Aug 2009 Last revised: 15 Sep 2010
Date Written: November 16, 2009
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: Suggested Citation