A comparative analysis of house prices and bubbles in the U.K. and New Zealand

Utilising a dynamic and forward-looking present value model, our analysis investigates whether bubbles exist in the New Zealand and U.K. housing markets by constructing an implied fundamental (real) price series based on what house prices 'should be' given expectations of household real disposable income and comparing these prices with actual prices. The analysis also investigates the type of behaviour driving revealed deviations from fundamental value. While we find evidence of bubbles in both markets, they occur in different time periods and would appear to be driven by different behaviour. The results suggest that U.K. house price deviations from their implied fundamental value are driven by an overreaction to future income, with price dynamics only coming into predominance when prices are well above or below this value. In contrast, New Zealand deviations appear to be driven by price dynamics alone.