Explosive Behaviour in Australian Housing Markets: Rational Bubbles or Not?

32 Pages Posted: 16 Dec 2015

See all articles by Philip Ji

Philip Ji

Dongguk University

Glenn Otto

UNSW Australia Business School, School of Economics

Date Written: December 15, 2015


Using recently developed econometric procedures (Phillips, Wu and Yu, 2011; Phillips, Shi and Yu, 2015), we find evidence of temporary episodes of explosive behaviour in price-to-rent ratios for established houses, in five of Australia’s largest cities. One interpretation of our results is that stochastic, rational bubbles were a feature of Australia’s major housing markets; particularly during the early to mid-2000s. However, further analysis of each city’s price-to-rent ratio indicates a very different pattern of behaviour in Sydney and Perth to that experienced in Brisbane, Adelaide and Canberra. For the latter three cities, we present evidence suggesting the explosive root tests are likely capturing the effects of a one-time structural break in their respective price-to-rent ratios. In any event, based on the estimated timing of the explosive episodes in Australia’s housing markets, there is little evidence that what might be identified as house price bubbles had any important negative consequences for the wider economy. Despite the ability of the econometric procedures to provide a real-time signal of explosive behaviour, results from Australian housing markets, suggest policymakers need to be cautious in responding too aggressively to a positive signal from the tests.

Keywords: Housing markets, Price-to-rent ratio, Rational Bubbles, Explosive roots

JEL Classification: C22, G12, R30

Suggested Citation

Ji, Philip and Otto, Glenn, Explosive Behaviour in Australian Housing Markets: Rational Bubbles or Not? (December 15, 2015). UNSW Business School Research Paper No. 2015-27, Available at SSRN: https://ssrn.com/abstract=2704108 or http://dx.doi.org/10.2139/ssrn.2704108

Philip Ji

Dongguk University ( email )

Korea, Republic of (South Korea)

Glenn Otto (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052

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