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

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.* We thank the comments and suggestions of two referees who significantly helped to improve the paper.

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

“…This complementarity echoes results by Baur and Heaney (2017) and Fry et al (2010). The general finding in these cases is that the addition of these robustness check variables does not alter the key results of the previously established regressions in any meaningful way.…”

Output Composition of the Monetary Policy Transmission Mechanism: Is Australia Different?

“…A more detailed study on the effects of monetary policy on the housing market in Australia, which relates to some research by Debelle (), Ellis () and Fry et al . () is out of the scope of this article…”

“…This simple identification strategy might not be the best one for a SVAR model of Australia specifically (for which Dungey and Pagan (, ), Fry et al . (, ) could be the most compelling candidates) but it might be a sound way for implementing an international comparison. Some further issues, such as the responses of net exports to a shock in monetary policy; the existence of the ‘cost channel’ in Australia; and the detailed effects of monetary policy on the housing market in Australia – which need different identification schemes to be examined extensively – are outside the scope of this article and left for future research.…”

“…() use a SVAR model to examine the role of portfolio shocks in Australia while Fry et al . () also use a SVAR model to investigate potential overvaluation in Australian housing and equity markets.…”

“…A comparison with previous studies on the Australian housing market might be useful here. However, previous papers concentrate on housing prices (Ellis, ; Fry et al ., ) or housing wealth (Debelle, ) rather than housing investment when analysing the effects of monetary policy shocks on the housing market in Australia. …”