Prices, Rents and Rational Speculative Bubbles in the Sydney Housing Market

Hatzvi, Eden; Otto, Glenn

doi:10.1111/j.1475-4932.2008.00484.x

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Prices, Rents and Rational Speculative Bubbles in the Sydney Housing Market

Economic Record, Vol. 84, No. 267, pp. 405-420, December 2008

16 Pages Posted: 10 Dec 2008

See all articles by Eden Hatzvi

Eden Hatzvi

University of New South Wales - School of Economics

Glenn Otto

UNSW Australia Business School, School of Economics

Abstract

We examine whether asset pricing theory can explain residential property prices. Using quarterly data for Local Government Areas in Sydney from 1991 to 2006, we find little evidence that variations in price: rent ratios anticipate future real rent growth. Instead changes in price: rent ratios apparently reflect changing expectations about future discount factors. Some important geographical differences in the behaviour of property prices across metropolitan Sydney are identified. A significant proportion of the variation in property prices in outer western regions of Sydney is not explained by either rents or discount factors; pointing to a possible role for a speculative bubble.

JEL Classification: G12, R21

Suggested Citation: Suggested Citation

Hatzvi, Eden and Otto, Glenn, Prices, Rents and Rational Speculative Bubbles in the Sydney Housing Market. Economic Record, Vol. 84, No. 267, pp. 405-420, December 2008, Available at SSRN: https://ssrn.com/abstract=1311544 or http://dx.doi.org/10.1111/j.1475-4932.2008.00484.x