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Is Housing Overvalued?

Author

Listed:
  • Ryan Fox

    (Reserve Bank of Australia)

  • Peter Tulip

    (Reserve Bank of Australia)

Abstract

This paper examines whether it costs more to own a home or to rent. We argue this is a useful criterion for assessing housing overvaluation. We use a new Australian dataset, which includes prices and rents for matched properties, letting us value housing in levels. We find that if real house prices grow at their historical average pace, then owning a home is about as expensive as renting. If prices grow more slowly, as some forecasters predict, the framework used in this paper suggests that the average home buyer would be financially better off renting. We decompose house prices into contributions from rents, interest rates and expected capital gains, which may help policymakers in the detection of housing bubbles. Recent data do not show signs of a bubble.

Suggested Citation

  • Ryan Fox & Peter Tulip, 2014. "Is Housing Overvalued?," RBA Research Discussion Papers rdp2014-06, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp2014-06
    as

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    File URL: https://www.rba.gov.au/publications/rdp/2014/pdf/rdp2014-06.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    dwelling prices; housing market; overvaluation; tenure choice; user cost;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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