Catch Animal Spirits in Auction: Evidence from New Zealand Property Market

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Journal Article
Real Estate Economics, 2018, 46 (1), pp. 59 - 84
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© 2017 American Real Estate and Urban Economics Association Following the animal spirits theory proposed by Akerlof and Shiller, this article contributes to behavior economics by investigating the possibility of using auction sales data to capture evidence of irrational exuberance in the housing market. Using the monthly percentages of residential property auction sales for Auckland, Wellington and Christchurch regions in New Zealand from 2006 to 2015, and the exuberance testing method proposed by Phillips, Shi and Yu, we find that animal spirits have been developing in the Auckland housing market since 2013, but not in other regions. When compared to the results based on price-to-rent ratios, auction sales provide more meaningful results for identifying market-wide irrational exuberance at an early stage. The causality test on price-to-rent ratios and auction sales volume shows that asset prices and animal spirits influence each other in the short run. In the long run, prices have significant effect on animal spirits, but not vice versa.
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