Dating the Timeline of House Price Bubbles in Australian Capital Cities

Abstract

House prices in some Australian capital cities have recently been on the rise to the extent that some describe this as an emerging bubble, but this claim remains formally untested to date. We apply a recently developed time series procedure to detect, and time‐stamp, bubbles in house price to rent ratios in Australian capital cities. The results show a sustained, yet varying, degree of speculative behaviour in all capital cities in the 2000s before the 2008 global financial crisis (GFC) engulfing different housing markets. The onset of these bubbles was soon after the federal government introduced a major change to the capital gains tax law, and all of these bubbles collapsed with or before the GFC. As of January 2016 only Sydney exhibits significant evidence of an exuberant rise in house prices compared to rents. We believe that the method we apply has the potential to be a general early warning indicator to detect housing bubbles in other countries/markets. We provide the programming files to enable researchers to implement this test in other countries.

When Bubble Meets Bubble: Contagion in OECD Countries

“…Recently, most papers have used the methodology proposed by Phillips et al (2015), based on recursive right-tailed unit root tests. Some examples include Harvey et al (2015), Jiang et al (2015), Shi et al (2015), Gómez-González et al (2015a), and Greenaway-McGrevy and Phillips (2016). In all of these papers multiple episodes of asset price exuberance have been encountered.…”

The Role of Tax and Subsidy Policy in Driving Australian House Prices

“…What is clear, supporting Shi et al (2016), is that any policy that exacerbates the relative size of capital gains to rental yields, after taxes, is predicted to amplify house price fluctuations. For this reason, policies aimed at neutralizing the current bias that comes from the concessionary tax treatment of capital gainsboth for investors and homeownersis likely to have the largest and most consistent impact on housing price fluctuations and affordability.…”

When bubble meets bubble : contagion in OECD countries

“…Of special relevance, the authors find evidence of explosive behavior arising two quarters earlier than in previous studies. Shi et al (2015) find housing price bubbles in all major Australian capital cities during the early 2000s. Greenaway-McGrevy and Phillips (2015) document evidence of episodic bubbles in the New Zealand property market over the past two decades.…”