House Prices and Bubbles in New Zealand
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This paper studies actual (real) house prices relative to fundamental (real) house values in New Zealand for the period 1970–2005. Utilizing a dynamic present value model, we find disparities between actual and fundamental house prices in the early 1970s and 1980s and from 2000 to date. We model the bubble component that is related to fundamentals (the intrinsic component), making it possible to highlight whether a bubble still exists after that component is accounted for. We then analyze any remaining bubble to detect any momentum behavior. Much of the overvaluation of the housing market is found to be due to price dynamics rather than an overreaction to fundamentals.
KeywordsReal house prices Real disposable income Fundamentals Present value Time-varying risk Bubbles New Zealand
JEL ClassificationG12 R31 G18
Financial support from the Education Trust of the Royal Institution of Chartered Surveyors (RICS) and the Department of Finance and Quantitative Analysis, University of Otago is gratefully acknowledged. The authors would also like to thank two anonymous referees, Nic Groenewold (University of Western Australia) and the participants at seminars held at the University of Aberdeen, the University of Otago, and the Reserve Bank of New Zealand (RBNZ) for helpful comments. The views expressed in this paper are those of the authors and do not necessarily reflect those of the RBNZ. The responsibility for any remaining errors or ambiguities is the authors alone.
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