Is Housing Overvalued?

An NPV Analysis of Buying versus Renting for Prospective Australian First Home Buyers

“…Selling costs in 2013 are estimated to account for about 3 per cent of the sale price in each capital city, based on web searching. This estimate is consistent with Fox and Tulip (). We assume that selling costs account for 3 per cent of the sale price in all capital cities for the whole study period.…”

“…A number of studies have examined buying versus renting in Australia by estimating the user cost of housing in Australia (Brown et al ., ; Hill & Syed, ; Fox & Tulip, ), in which the user cost of housing is typically measured as the one‐off costs and ongoing costs of buying less home price appreciation. Our study takes a different approach to these studies as it directly estimates the NPVs of both buying and renting for each of the eight capital cities, taking into account all the important benefits and costs associated with buying and renting.…”

“…Many studies find evidence of overvaluation in the Australian housing market (Bodman & Crosby, ; Fry et al ., ; Tumbarello & Wang, ), while others suggest that home price growth can be explained by economic fundamentals (Otto, ; Fox & Finlay, ). Some studies also find overvaluation in Australian housing market in some periods and undervaluation in other periods (Abelson et al ., ; Hill & Syed, ; Fox & Tulip, ).…”

Dating the Timeline of House Price Bubbles in Australian Capital Cities

“…This is the first study to formally test for an asset bubble in the Australian housing market. Three previous studies for Australia to which our contribution is related are Costello et al (2011), Fox andTulip (2014) and Fry et al (2010). Costello et al (2011) use a vector autoregressive model to ascertain the fundamental component of house prices and examine the extent to which the non-fundamental components spill over between states, while Fox and Tulip (2014) address the question whether it costs more to own or rent.…”

“…On the issue of house prices in Australia, Fox and Tulip () conclude that recent data do not show signs of a bubble. They are very careful to note that their focus is the question of whether house prices are fair (not overvalued) given their rent and user costs (or alternatively, whether rents are fair given prices and user costs).…”