Appendix I. Data Definition and Sources
Appendix II. Econometric Model
Appendix III. Event Analysis: Definition of Episodes
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We wish to thank the Australian Treasury officials for their valuable suggestions. This paper has greatly benefited from comments by participants in the seminar held at the Australian Treasury in Canberra in July 2010. We also wish to thank Nicoletta Batini and Ben Hunt for their comments. We are particularly thankful to Prof. Vance Martin for his suggestions on the econometric model. We are very grateful to Ray Brooks for his guidance on this project. Kessia De Leo, Ranee Sirihorachai, and Moshe Shamouilian provided excellent editorial and research assistance.
In 2009, Australia’s population grew by over 2 percent, of which more than half was driven by net migration. In New Zealand, between 2001 and 2006, adult population increased by 8 percent (cumulative), with 93 percent of this increase driven by net migration (Maré and Stillman, 2008). Canada’s population grew only by 1 percent starting in 2001, with net immigration accounting for ⅔ of this increase.
Moreover, for Australia the house price series only covers the eight largest cities, while denominator (income) includes the entire country (Battellino, 2010). Therefore these statistics may not be an accurate measure of affordability, resulting in an upward bias of the house price-to-income ratios.
Ireland was among the countries experiencing the most pronounced housing boom-and-bust cycle and is still in the process of downward corrections.
If two or more non-stationary variables are cointegrated, then they do not deviate continually from the long-run equilibrium relationship.
Technically, both sets of estimates are super consistent i.e., they converge to the true values at a faster rate than the case where the variables are stationary. Ideally the result from the cointegrating vector should line up with the OLS single equation results. In practice, for databases particularly noisy such as house prices the single equation model estimated through the OLS with variables expressed in level provides a consistency check for the sign and the significance of the coefficients.
See Williams 2009, and Egert and Mihaljeck, 2007. Egert and Mihaljeck show that the average long-run elasticity of house prices to the working-age population ratio is close to 4 for 19 OECD countries.
The variance decomposition also shows that the interest rate in Australia plays a larger role in explaining house prices changes than in New Zealand and Canada.
By using the terms of trade as a proxy for income, the model implicitly assumes that over the medium term, the structure of these economies will not change. Commodities are still expected to have a large impact on the economy, both through direct (production and exports) and indirect (nominal income) channels. For Canada, Tsounta (2009) indeed finds a similar degree of misalignment in house prices by using disposable income.
Contrary to the terms of trade, the coefficient of real per capita income appears with the wrong sign (negative) most of the time (we report only one specification here), allowing the coefficient of working-age population to be larger.