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Prices, Rents and Rational Speculative Bubbles in the Sydney Housing Market

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  • EDEN HATZVI
  • GLENN OTTO

Abstract

We examine whether asset pricing theory can explain residential property prices. Using quarterly data for Local Government Areas in Sydney from 1991 to 2006, we find little evidence that variations in price : rent ratios anticipate future real rent growth. Instead changes in price : rent ratios apparently reflect changing expectations about future discount factors. Some important geographical differences in the behaviour of property prices across metropolitan Sydney are identified. A significant proportion of the variation in property prices in outer western regions of Sydney is not explained by either rents or discount factors; pointing to a possible role for a speculative bubble.

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  • Eden Hatzvi & Glenn Otto, 2008. "Prices, Rents and Rational Speculative Bubbles in the Sydney Housing Market," The Economic Record, The Economic Society of Australia, vol. 84(267), pages 405-420, December.
    • Handle: RePEc:bla:ecorec:v:84:y:2008:i:267:p:405-420
    DOI: 10.1111/j.1475-4932.2008.00484.x
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    Cited by:

    1. Costello, Greg & Fraser, Patricia & Groenewold, Nicolaas, 2011. "House prices, non-fundamental components and interstate spillovers: The Australian experience," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 653-669, March.
    2. Ian Davidoff & Andrew Leigh, 2013. "How Do Stamp Duties Affect the Housing Market?," The Economic Record, The Economic Society of Australia, vol. 89(286), pages 396-410, September.
    3. Glenn Otto & Nigel Stapledon, 2017. "How Predictable? Rent Growth and Returns in Sydney and Melbourne Housing Markets," Discussion Papers 2017-01, School of Economics, The University of New South Wales.
    4. Philip Inyeob Ji & Glenn Otto, 2015. "Explosive Behaviour in Australian Housing Markets: Rational Bubbles or Not?," Discussion Papers 2015-27, School of Economics, The University of New South Wales.
    5. Ogonna Nneji & Chris Brooks & Charles Ward, 2011. "Intrinsic and Rational Speculative Bubbles in the U.S. Housing Market 1960-2009," ICMA Centre Discussion Papers in Finance icma-dp2011-01, Henley Business School, University of Reading.
    6. Shengguo Li & Jiaqi Liu & Jichang Dong & Xuerong Li, 2021. "20 Years of Research on Real Estate Bubbles, Risk and Exuberance: A Bibliometric Analysis," Sustainability, MDPI, vol. 13(17), pages 1-24, August.
    7. Brian Micallef & Nathaniel Debono, 2020. "The rental sector and the housing block in STREAM," CBM Working Papers WP/03/2020, Central Bank of Malta.
    8. Tim Keighley & Thomas Longden & Supriya Mathew & Stefan Trück, 2014. "Quantifying Catastrophic and Climate Impacted Hazards Based on Local Expert Opinions," Working Papers 2014.93, Fondazione Eni Enrico Mattei.
    9. Hill, Robert J. & Syed, Iqbal A., 2016. "Hedonic price–rent ratios, user cost, and departures from equilibrium in the housing market," Regional Science and Urban Economics, Elsevier, vol. 56(C), pages 60-72.
    10. Truong, Chi & Trück, Stefan, 2016. "It’s not now or never: Implications of investment timing and risk aversion on climate adaptation to extreme events," European Journal of Operational Research, Elsevier, vol. 253(3), pages 856-868.
    11. Renée A. Fry & Vance L. Martin & Nicholas Voukelatos, 2010. "Overvaluation in Australian Housing and Equity Markets: Wealth Effects or Monetary Policy?," The Economic Record, The Economic Society of Australia, vol. 86(275), pages 465-485, December.
    12. Ryan Fox & Peter Tulip, 2014. "Is Housing Overvalued?," RBA Research Discussion Papers rdp2014-06, Reserve Bank of Australia.
    13. Alexey Akimov & Simon Stevenson & James Young, 2015. "Synchronisation and commonalities in metropolitan housing market cycles," Urban Studies, Urban Studies Journal Limited, vol. 52(9), pages 1665-1682, July.
    14. Lan, Hao & Moreira, Fernando & Zhao, Sheng, 2023. "Can a house resale restriction policy curb speculation? Evidence from a quasi-natural experiment in China," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 841-859.
    15. Mei Liu & Qing-Ping Ma, 2021. "Determinants of house prices in China: a panel-corrected regression approach," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 67(1), pages 47-72, August.
    16. Galina An & Charles Becker & Enoch Cheng, 2021. "Bubbling Away: Forecasting Real Estate Prices, Rents, and Bubbles in a Transition Economy," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 63(2), pages 263-317, June.
    17. P. S. Morawakage & G. Earl & B. Liu & E. Roca & A. Omura, 2023. "Housing Risk and Returns in Submarkets with Spatial Dependence and Heterogeneity," The Journal of Real Estate Finance and Economics, Springer, vol. 67(4), pages 695-734, November.
    18. Shuping Shi & Arafat Rahman & Ben Zhe Wang, 2020. "Australian Housing Market Booms: Fundamentals or Speculation?☆," The Economic Record, The Economic Society of Australia, vol. 96(315), pages 381-401, December.
    19. Yang Yang & Michael Rehm & Mingquan Zhou, 2021. "Housing Price Volatility: What's the Difference between Investment and Owner‐Occupancy?," The Economic Record, The Economic Society of Australia, vol. 97(319), pages 548-563, December.
    20. Katja Hanewald & Michael Sherris, 2013. "Postcode-Level House Price Models for Banking and Insurance Applications," The Economic Record, The Economic Society of Australia, vol. 89(286), pages 411-425, September.
    21. Katja Hanewald & Michael Sherris, 2011. "House Price Risk Models for Banking and Insurance Applications," Working Papers 201118, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
    22. Robert Hill, 2013. "How Can One Tell When the Housing Market Is Out of Equilibrium?," ERES eres2013_59, European Real Estate Society (ERES).
    23. Truong, Chi & Trück, Stefan & Mathew, Supriya, 2018. "Managing risks from climate impacted hazards – The value of investment flexibility under uncertainty," European Journal of Operational Research, Elsevier, vol. 269(1), pages 132-145.
    24. Glenn Otto, 2021. "Accounting for Longer‐Run Changes in Australian House Prices," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 54(3), pages 362-374, September.

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