Explosive Behaviour in Australian Housing Markets: Rational Bubbles or Not?

Philip Ji () and Glenn Otto ()
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Philip Ji: Department of Economics, Dongguk University Seoul
Glenn Otto: School of Economics, UNSW Business School, UNSW

No 2015-27, Discussion Papers from School of Economics, The University of New South Wales

Abstract: Using recently developed econometric procedures (Phillips, Wu and Yu, 2011; Phillips, Shi and Yu, 2015), we find evidence of temporary episodes of explosive behaviour in price-torent ratios for established houses, in five of Australia’s largest cities. One interpretation of our results is that stochastic, rational bubbles were a feature of Australia’s major housing markets; particularly during the early to mid-2000s. However, further analysis of each city’s price-to-rent ratio indicates a very different pattern of behaviour in Sydney and Perth to that experienced in Brisbane, Adelaide and Canberra. For the latter three cities, we present evidence suggesting the explosive root tests are likely capturing the effects of a one-time structural break in their respective price-to-rent ratios. In any event, based on the estimated timing of the explosive episodes in Australia’s housing markets, there is little evidence that what might be identified as house price bubbles had any important negative consequences for the wider economy. Despite the ability of the econometric procedures to provide a real-time signal of explosive behaviour, results from Australian housing markets, suggest policymakers need to be cautious in responding too aggressively to a positive signal from the tests.

Keywords: Housing markets; price-to-rent ratio; rational bubbles; explosive roots (search for similar items in EconPapers)
JEL-codes: C22 G12 R30 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2015-12
New Economics Papers: this item is included in nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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