House Price Efficiency: Expectations, Sales, Symmetry

Abstract

An efficient housing market is of critical importance for individual welfare and for a well-functioning economy. We test the efficiency of this market by estimating the factors that determine both the long-run and the dynamic paths of regional house prices. Our tests use a new quarterly regional panel data set covering the 14 regions of New Zealand from 1981 to 2002. The tests indicate that regional housing markets converge to an equilibrium consistent with consumer optimising conditions, and hence with long-run efficiency. However, some conditions required for short-run (dynamic) efficiency are violated. We find that extrapolative price expectations, based on past regional phenomena, lead to overshooting of house prices in response to new region-specific information. We also find that price dynamics are influenced by past regional house sales activity and that the dynamic adjustment process is asymmetric depending on whether house prices are above or below their long-run equilibrium.

The Ups and Downs of New Zealand House Prices

“…The logically next stage is to carry out multivariate work. This would complement the long-run and dynamic adjustment process work reported in Grimes, Aitken and Kerr (2004) referred to in our Introduction, and in which regional economic activity, the expected real user cost of capital, the regional housing stock, and an asymmetric influence of regional house sales activity were all found significant.…”

“…In Grimes, Aitken and Kerr (2004), from OLS and SUR regressions of panel data, for 14 economic regions over the period 1981q1 to 2002q4, it was concluded that for long run New Zealand a 1 percent increase in 1 Our classification is therefore less restrictive than that used in the IMF's (2003) investigation of asset price booms and busts for 19 industrial countries in the postwar period. They define house price booms as large and persistent increases, which begin with a peak and end with the subsequent peak, i.e.…”

House Price Forecasts, Forecaster Herding, and the Recent Crisis

“…In fact, earlier researchers have focused on concepts like housing market efficiency and rationality of forecasts. For example, Grimes et al [5] study housing market efficiency and overshooting of house prices based on regional data for New Zealand. Song et al [6] and Aggarwal and Mohanty [7] analyze the rationality of forecasts of U.S. housing starts published in the Money Market Services.…”

What's the Beef with House Prices? Economic Shocks and Local Housing Markets

“…That model was adapted by Grimes et al (2004) to model long-run and short-run house price determinants at RC level in New Zealand using data available at that level of disaggregation. As described in Section 0 of this paper, our TLA data is more refined than that available for the RC study; we have adapted the Pain and Westaway framework to suit the data at hand.…”

“…6 In particular, it builds on Grimes et al (2004), which estimates the determinants of house prices at a Regional Council (RC) level within New Zealand. It is also substantially informed by the TLA and RC time series work in Grimes et al (2004). In our structural modelling (Section 4), we adopt a similar theoretical approach to the former study.…”