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Overvaluation in Australian Housing and Equity Markets: Wealth Effects or Monetary Policy?

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  • RENÉE A. FRY
  • VANCE L. MARTIN
  • NICHOLAS VOUKELATOS

Abstract

A structural vector autoregression model is used to identify overvaluation in house prices in Australia from 2002 to 2008. An important feature is the development of a housing sector where long-run restrictions are derived from theory to identify housing demand and supply shocks. The results show strong evidence of overvaluation in real house prices, reaching a peak of just over 15 per cent by the end of 2003. Factors driving overvaluation are housing demand shocks before 2006 and post‐2006 macroeconomic shocks. Wealth effects from equity markets are also important. The results suggest that monetary policy is not an important contributor to overvaluation of house prices.

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File URL: http://hdl.handle.net/10.1111/j.1475-4932.2010.00639.x
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Article provided by The Economic Society of Australia in its journal Economic Record.

Volume (Year): 86 (2010)
Issue (Month): 275 (December)
Pages: 465-485

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Handle: RePEc:bla:ecorec:v:86:y:2010:i:275:p:465-485
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Keywords: E21 ; E44 ; C32 ; R21 ;

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Find related papers by JEL classification:
  • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
  • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
  • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
  • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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  1. Elbourne, Adam, 2008. "The UK housing market and the monetary policy transmission mechanism: An SVAR approach," Journal of Housing Economics, Elsevier, vol. 17(1), pages 65-87, March.
  2. Glenn Otto, 2007. "The Growth of House Prices in Australian Capital Cities: What Do Economic Fundamentals Explain?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 40(3), pages 225-238, 09.
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  12. Iacoviello, Matteo, 2000. "House prices and the macroeconomy in Europe: Results from a structural var analysis," Working Paper Series 0018, European Central Bank.
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Cited by:

  1. 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.
  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. 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.
  4. 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.

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