House Price Efficiency: Expectations, Sales, Symmetry

Motu Working Paper Series No. 04-02

46 Pages Posted: 3 Aug 2004

See all articles by Arthur Grimes

Arthur Grimes

Motu Economic and Public Policy Research Trust

Andrew Aitken

Motu Economic and Public Policy Research

Suzi Kerr

Motu Economic and Public Policy Research Trust

Date Written: May 2004

Abstract

An efficient housing market is of critical importance for individual welfare and for a well-functioning economy. We test the efficiency of this market by estimating the factors that determine both the long-run and the dynamic paths of regional house prices. Our tests use a new quarterly regional panel data set covering the 14 regions of New Zealand from 1981 to 2002. The tests indicate that regional housing markets converge to an equilibrium consistent with consumer optimising conditions, and hence with long-run efficiency. However, some conditions required for short-run (dynamic) efficiency are violated. We find that extrapolative price expectations, based on past regional phenomena, lead to overshooting of house prices in response to new region-specific information. We also find that price dynamics are influenced by past regional house sales activity and that the dynamic adjustment process is asymmetric depending on whether house prices are above or below their long-run equilibrium.

Keywords: House prices, housing appreciation, housing market, adjustment dynamics

JEL Classification: G14, R21, R31

Suggested Citation

Grimes, Arthur and Aitken, Andrew and Kerr, Suzi, House Price Efficiency: Expectations, Sales, Symmetry (May 2004). Motu Working Paper Series No. 04-02. Available at SSRN: https://ssrn.com/abstract=571961 or http://dx.doi.org/10.2139/ssrn.571961

Arthur Grimes (Contact Author)

Motu Economic and Public Policy Research Trust ( email )

19 Milne Terrace
Island Bay
Wellington 6002
New Zealand

Andrew Aitken

Motu Economic and Public Policy Research ( email )

Level 1, 93 Cuba Street
P.O. Box 24390
Wellington, 6142
New Zealand

Suzi Kerr

Motu Economic and Public Policy Research Trust ( email )

Level 1, 93 Cuba Street
P.O. Box 24390
Wellington, 6142
New Zealand
+64 4 383 4250 (Phone)
+64 4 383 4270 (Fax)

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