Is Housing Overvalued?

53 Pages Posted: 20 Sep 2014 Last revised: 23 May 2015

See all articles by Ryan Fox

Ryan Fox

Reserve Bank of Australia

Peter Tulip

Reserve Bank of Australia

Date Written: July 14, 2014


This paper examines whether it costs more to own a home or to rent. We argue this is a useful criterion for assessing housing overvaluation. We use a new Australian dataset, which includes prices and rents for matched properties, letting us value housing in levels. We find that if real house prices grow at their historical average pace, then owning a home is about as expensive as renting. If prices grow more slowly, as some forecasters predict, the framework used in this paper suggests that the average home buyer would be financially better off renting. We decompose house prices into contributions from rents, interest rates and expected capital gains, which may help policymakers in the detection of housing bubbles. Recent data do not show signs of a bubble.

Keywords: dwelling prices, housing market, overvaluation, user cost

JEL Classification: R00, R21

Suggested Citation

Fox, Ryan and Tulip, Peter, Is Housing Overvalued? (July 14, 2014). Available at SSRN: or

Ryan Fox

Reserve Bank of Australia ( email )

65, Martin Place
Sydney, NSW 2000

Peter Tulip (Contact Author)

Reserve Bank of Australia ( email )

GPO Box 3947
Sydney, NSW 2001
61-2-9551-8831 (Phone)


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