House Prices, Disposable Income and Permanent and Temporary Shocks: The N.Z., U.K. and U.S. Experience

Using quarterly data over 1973:4-2008:2, two-variable systems of house prices and income are specified for three major house-owning economies: New Zealand (N.Z.), the U.K. and the U.S. After considering differences in price−income relationships over sub-periods, the analysis compares responses of house prices when faced with permanent and temporary shocks to each system, and continues by decomposing each historical house price series into its permanent, temporary and deterministic components. The evidence suggests that N.Z. and U.K. housing markets are sensitive to both permanent and temporary shocks to income, while the U.S. market reacts to temporary shocks with the permanent component having a largely insignificant role to play in house price composition. In N.Z., the temporary component of house prices has tended to be positive over time, pushing prices higher than they would have been otherwise; while in the U.K., both permanent and temporary components have tended to reinforce each other.