This paper examines the ability of standard economic factors to explain the growth of real house prices in Australia's capital cities. Dynamic models are estimated for each city with the objective of identifying the major drivers of house price growth rates. The variable mortgage rate is found to be an important influence on growth rates in all eight capital cities. However, the size of the mortgage rate effect can differ substantially between cities. For example a 25 basis point rise in the mortgage rate reduces the long-run quarterly growth rate of real house prices by about 1 per cent in Sydney compared with only 0.4 per cent in Adelaide. The effects of other economic variables are less systematic, significantly affecting the growth rate of capital gains in some cities but not in others. Nevertheless, for most Australian cities economic factors are found to explain around 40 to 60 per cent of the variation in the growth rate of house prices.
The role of public services in private production is quantified for the Australian economy over the period 1966/67–1989/90. Public capital is shown to have a significant and positive impact on private production and private total factor productivity. The extent to which these results can contribute towards the debate about appropriate levels of public investment is also considered.
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