Abstract:
Many housing markets across the globe have experienced upward trends in real estate prices during the past 2 decades. In Auckland, the largest housing market in New Zealand, an increase in residential property prices has made the city one of the most unaffordable in the world. This study aims to examine the growth in housing prices and relevant issues including property speculation, housing price volatility, the elasticity of housing supply and buyers’ expectations. This research has a few new features such as a differentiation between investors and owner-occupiers that make it different from the existing housing literature.
The research is a combination of several articles that have been published in peer-reviewed journals or under consideration (at least have passed the initial screening phase and have been sent out by editors for reviewers’ comments). Chapter 2 considers rental property transactions from 2002 to 2016 within the Auckland region. A cash-flow model is applied to emulate the before-tax investment calculation used during purchasers’ due diligence. Whether a transaction involves speculation on capital gains or not is determined by the degree of speculation derived from the model. The finding demonstrates that the majority of transactions have a high degree of speculation. Chapter 3 constructs a vector error correction model (VECM) to examine the interplay between housing prices and speculation. It also investigates the housing price elasticity in Auckland as price responsiveness is important for understanding the topic in a supply-constrained market. The finding uncovers a feedback loop in a market with highly inelastic housing supply: investors’ speculative behaviour lifts real estate prices which in turn spur further housing speculation. Chapter 4 examines housing price volatility and its determinants for two types of transactions, leveraged investment and leveraged owner-occupancy, using generalised autoregressive conditional heteroscedasticity (GARCH) models and vector autoregression
(VAR) models. It is found that the volatility of those two types of transactions responds differently to shocks with a shock in the growth rate of housing prices being the most significant determinant of housing price volatility. Chapter 5 aims to test whether buyers’ expectations are adaptive in Auckland using VECM. The finding reveals that property buyers’ expectations largely depend on housing price history.