Overvaluation in Australian Housing and Equity Markets: Wealth Effects or Monetary Policy?

A structural vector autoregression model is used to identify overvaluation in house prices in Australia from 2002 to 2008. An important feature is the development of a housing sector where long-run restrictions are derived from theory to identify housing demand and supply shocks. The results show strong evidence of overvaluation in real house prices, reaching a peak of just over 15 per cent by the end of 2003. Factors driving overvaluation are housing demand shocks before 2006 and post-2006 macroeconomic shocks. Wealth effects from equity markets are also important. The results suggest that monetary policy is not an important contributor to overvaluation of house prices.