The estimation of house bubbles during the time of pandemic: a study of Australia

ABSTRACT

While the economy slid into a recession since the onset of the COVID-19 pandemic, the house prices in many markets have reached historical highs. This research aims to examine how much the recent large increases in the prices can be explained by bubbles and whether the overvaluation is due to momentum or intrinsic bubbles. A present value model is constructed to estimate real estate bubbles with one dynamic and three assumed net rental yields. The empirical focus is on Sydney, Melbourne and Brisbane, the three largest residential property markets in Australia, that have experienced a rapid growth in house prices since the outbreak of coronavirus. The finding demonstrates the evidence of bubbles in all three markets during the study period but the degree of overvaluation varies. We also discover that momentum bubbles exist in these markets but the overvaluation is mainly explained by intrinsic bubbles.