Explaining House Prices in Australia: 1970–2003*

Abstract

This paper aims to explain changes in real house prices in Australia from 1970 to 2003. We develop and estimate a long‐run equilibrium model that shows the real long‐run economic determinants of house prices and a short‐run asymmetric error correction model to represent house price changes in the short run. We find that, in the long run, real house prices are determined significantly and positively by real disposable income and the consumer price index. They are also determined significantly and negatively by the unemployment rate, real mortgage rates, equity prices and the housing stock. Employing our short‐run asymmetric error correction model, we find that there are significant lags in adjustment to equilibrium. When real house prices are rising at more than 2 per cent per annum, the housing market adjusts to equilibrium in approximately four quarters. When real house prices are static or falling, the adjustment process takes six quarters.

Is the Australian housing market in a bubble?

“…International Journal of Housing Markets and Analysis 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 t i o n a l J o u r n a l o f H o u s i n g M a r k e t s a n d A n a 5 Furthermore, while house price dynamics have been explored previously (Abelson et al, 2005;Bodman and Crosby, 2004;Bourassa and Hendershott, 1995;Hatzi and Otto, 2008;Kohler and Van Der Merwe, 2015;Otto, 2007), limited empirical tests have been performed on contemporary data to understand the implications of the most recent housing boom in Australia.…”

“…Focusing upon sub-market analysis (Wilson et. al., 2011), the majority of previous studies investigating Australian house prices have been confined to data gathered in major capital cities (Abelson et al, 2005;Bodman & Crosby, 2004;Hatzi & Otto, 2008;Otto, 2007.…”

“…Limited analysis has been performed to capture the implications of the Australian housing market at the national level (Abelson et al, 2005); therefore, this research aims to address this knowledge gap by being the first to study housing bubbles in Australia at the national level. This is very important question, as deeper understanding of the housing market issues from the national perspective may facilitate comparative analysis between the national and regionally disaggregated factors, also helping to optimize the aggregate economic and housing market performance.…”

“…A number of studies also have presented evidence that these key determinants simultaneously impact mortgage/housing demand and changes in house prices (Kohler and Van Der Merwe, 2015;Abelson et al, 2005;Otto, 2007) Econometric methodology and specification…”

Forecasting the U.S. real house price index

“…In comparison to previous studies we use a much longer sample spanning annual  The real GDP per capita (RGDPPC) (Agnello and Schuknecht, 2011;Case and Shiller, 1990)  The long term interest rate (LTR) and the short term interest rate (STR) (McGibany and Nourzad, 2004;Mikhed andZemčík, 2009 Agnello andSchuknecht, 2011)  The population (POP) (Agnello and Schuknecht, 2011;Mikhed and Zemčík, 2009;Case and Shiller, 1990;Case and Mayer, 1996)  The real stock price (RSP) (Abelson et al, 2005;Mikhed and Zemčík, 2009;Rapach and Strauss, 2009)  The real construction cost (RCONSTR) (Case and Shiller, 1990;Jud and Winkler, 2002;Mikhed and Zemčík, 2009;Zeno and Füss, 2010)  The unemployment rate (UNEMPL) (Case and Mayer, 1996;Abelson et al, 2005;Rapach and Strauss, 2007)  The inflation rate (INFL) (Stevenson, 2000;Abelson et al, 2005;Rapach and Strauss, 2007)  The real oil price (ROILP) (Padilla, 2005;Beltratti and Morana, 2010)  The ratio of budget deficit/surplus as a fiscal policy indicator (FISPOL) Sousa, 2011, 2012;Agnello and Schuknecht, 2011;Agnello and Sousa, forthcoming)…”