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Overvaluation In Australian Housing And Equity Markets: Wealth Effects Or Monetary Policy?

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  • Renee A. Fry

    ()

  • Vance L. Martin
  • Nicholas Voukelatos

Abstract

A 7 variate SVAR model is used to identify the presence and causes of overvaluation in real house prices in Australia from 2002 to 2008. An important feature of the model is the development of a housing sector where long-run restrictions are derived from economic theory to identify housing demand and supply shocks. The empirical results show that real house prices were overvalued during the period, reaching a peak of nearly 20% by the end of 2003. Important factors driving the observed overvaluation are housing demand shocks prior to 2006, and macroeconomic shocks in the goods market post 2006. Wealth effects from portfolio shocks in equity markets are also found to be an important driver. The results also suggest that monetary policy is not an important contributing factor in the overvaluation of house prices.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2009-10.

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Length: 37 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:een:camaaa:2009-10

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  1. Kam-Ki Tang, 2006. "The wealth effect of housing on aggregate consumption," Applied Economics Letters, Taylor & Francis Journals, vol. 13(3), pages 189-193.
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Cited by:
  1. Wadud, I.K.M. Mokhtarul & Bashar, Omar H.M.N. & Ahmed, Huson Joher Ali, 2012. "Monetary policy and the housing market in Australia," Journal of Policy Modeling, Elsevier, vol. 34(6), pages 849-863.
  2. Tuan Anh Phan, 2014. "Output Composition of the Monetary Policy Transmission Mechanism: Is Australia Different?," Crawford School Research Papers 1403, Crawford School of Public Policy, The Australian National University.
  3. Kevin Davis, 2011. "The Australian Financial System in the 2000s: Dodging the Bullet," RBA Annual Conference Volume, in: Hugo Gerard & Jonathan Kearns (ed.), The Australian Economy in the 2000s Reserve Bank of Australia.
  4. Judith Yates, 2011. "Housing in Australia in the 2000s: On the Agenda Too Late?," RBA Annual Conference Volume, in: Hugo Gerard & Jonathan Kearns (ed.), The Australian Economy in the 2000s Reserve Bank of Australia.

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