Overvaluation in Australian housing and equity markets: Wealth effects or monetary policy?

Author name: 
Fry RA
Martin VL
Voukelatos N.

A 7 variate SVAR model is used to identify the presence and causes of overvaluation in real house prices in Australia from 2002 to 2008. An important feature of the model is the develepment of a housing sector where long-run restrictions are derived from economic theory to identify housing demand and supply shocks. The empirical results show that real house prices were overvalued during the period, reaching a peak of nearly 20% by the end of 2003. Important factors driving the observed overvaluation are housing demand shocks prior to 2006, and macroeconomic shocks in the goods market post 2006. Wealth effects from portfolio shocks in equity markets are also found to be an important driver. The results also suggest that monetary policy is not an important contributing factor in the overvaluation of house prices.

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