Housing price bubbles in Greater Sydney: evidence from a submarket analysis

Recognising the rapid increase in housing prices and the presence of socio-economic and demographic disparities that often characterise a metropolitan city, we adopted a sub-city approach and deployed an array of methods to detect bubbles in the different regions of Greater Sydney – western, inner-west, southern, eastern and northern – over 1991 to 2016, using Westerlund error correction-based panel cointegration, backward supremum augmented Dickey–Fuller (BSADF) procedure, and dynamic ordinary least square (DOLS) tests. Our cointegration results show no evidence of cointegration between real house price and rent in the western region. However, there is strong evidence of cointegration in the eastern and northern regions. This confirms the existence of housing submarkets in Greater Sydney, and an indication of housing price bubbles in Western Sydney. Further, the formal BSADF bubble tests reveal strong evidence of explosive price bubbles in Western Sydney, while there is no comparable evidence for the other regions of Sydney, which further highlights the importance of submarket analysis. Importantly, the DOLS results suggest that housing investment plays a major role in the build-up of housing bubbles in Western Sydney, supporting Shiller's Psychological Theory of bubbles which posits that bubbles occur via the speculative behaviour of investors. The implications of the findings are also discussed.