Housing prices and expectations : a study of Auckland

Purpose: The purpose of this paper is twofold. First, the study aims to test whether expectations are adaptive in the Auckland housing market. The second purpose is to examine the interplay between expectations and Auckland housing prices. Design/methodology/approach: In this study, two vector error correction models (VECM) are built: one VECM includes survey-based expectations and another one encompasses model-based expectations with the assumption that property investors’ expectations are adaptive. The paper goes on by comparing and examining the results of Granger causality tests and impulse response analyses. Findings: The findings reveal that Auckland property buyers’ expectations are adaptive. In addition, this study provides some evidence of a feedback cycle between Auckland housing prices and expectations. Research limitations/implications: This study posits that Auckland property buyers’ expectations in the next 12 months are based on three-year price movements with more emphasis being placed on recent price history. This assumption may not be an accurate reflection of true expectations. Practical implications: This paper helps policymakers to deepen their understanding of Auckland property buyers by showing that their expectations form through the extrapolation of the past price trend. Originality/value: The study possibly marks the first attempt to test and compare the relationship between housing prices and two forms of expectations: survey-based and model-based. Additionally, this study is probably the first one that empirically examines whether there is a feedback cycle between expectations and property prices in the Auckland housing market.