House Prices and Bubbles in New Zealand

This paper studies actual (real) house prices relative to fundamental (real) house values in New Zealand for the period 1970-2005. We find disparities between actual and fundamental house prices in the early 1970s and 1980s and from 2000 to date. These deviations are found to be substantially more pronounced than for New Zealand stocks. Contrary to the results that have been reported for many other countries, however, there is no evidence of a deviation in the latter part of the 1980s. Finally,we find that the current deviation of house prices from fundamentals is due to price dynamics rather than an overreaction to fundamentals.