Price linkages between Australian housing and stock markets

Abstract

Purpose The purpose of this study is to examine the linkages between Australian house prices and stock prices under the Toda and Yamamoto test framework. Specifically, it investigated whether there is a capital switching effect between house prices and stock prices. Design/methodology/approach This study examined the linkages between house prices and stock prices under the Toda and Yamamoto test framework. To accommodate the impact of the global financial crisis (GFC), a sub-period analysis was undertaken. To assess the impact of investor structure, the tests were also performed for small cap stocks and large cap stocks individually. Findings The empirical results reveal a negative lead–lag relationship between house prices and stock prices in Australia, suggesting the existence of capital switching activities between housing and stocks. The impact of the GFC on the lead–lag relationship between house prices and stock prices is also documented. Before the crisis, a causality transmission was running from house prices to stock prices, whilst stock prices appeared to lead house prices after the crisis. The capital switching activities between housing and stocks are more evident for small cap stocks. Originality/value This study is the first to examine the linkages between house prices and stock prices under the Toda and Yamamoto test framework. This is the first study to explore the impacts of the GFC on the lead–lag relationship between the two asset prices under the capital switching framework. This study is also the first to provide empirical evidence regarding the existence of capital switching activities between housing and stocks. In addition, the impact of investor structure on the interrelationship between the two asset prices is examined for the first time under the capital switching framework.

What Motivates Speculators to Speculate?

“…Significantly, an estimated 514,000 Hong Kongers invested in property outside Hong Kong in 2016 [ 67 ], representing 7% of Hong Kong’s population at around 7.4 million [ 68 ], a trending figure that continues to increase. Similar issues (e.g., in regards to housing affordability in Sydney, Australia [ 69 , 70 , 71 ] and Vancouver, Canada [ 56 , 72 , 73 ]) parallel the global crisis of urban land speculation practices in which “accelerated (re)urbanization of capital and people [has led to] the provision of cheap credit and the rise of intra-society inequality” [ 56 ]. Nonetheless, global real estate is considered a class of capital for which investors “diversify their investment portfolios” [ 74 ] often at the expense of local community housing affordability interrelated via political and economic spheres.…”

Wealth Effects on Household Final Consumption: Stock and Housing Market Channels

“…The measurement of the wealth and consumption linkage dates back to Ando and Modigliani (1963) in the modern finance era. Several studies (among others, Ibrahim 2010; Lee et al 2017) about the correlation between stock and house prices have not taken into account the correlated effects in consumption. Some studies (among others, Ibrahim and Habibullah 2010) have analysed the correlation between the stock market and the aggregate consumption without considering the effects of the housing sector, whereas others (among others, Attanasio et al 2009) have analysed the correlation between the housing market and the aggregate consumption without considering the effects of the stock market.…”

House price and household consumption in China: evidence from micro-level data

“…Rather than limit prices in the housing market, policymakers should promote the healthy development of the housing or real estate market. For example, the government can provide a first homeowners grant to encourage people to buy a house and a return-risk relationship, that is intuitively more appealing can be established in the housing market (Lee and Reed, 2014;Lee et al, 2017). Apart from regulatory instruments, the real estate market needs supportive policies to form a marketized price.…”

“…Literature review Many scholars believe that a household's consumption relies on its wealth (Etheridge, 2015;Dong et al, 2017;De Magalhães and Santaeulàlia-Llopis, 2018;Alp and Seven, 2019). Wealth is not limited to housing wealth; however, it also includes financial assets (Barrell et al, 2015;Lee et al, 2017). Modern consumption theories, such as the absolute/relative/permanent income theory of consumption and the life cycle theory of consumption, suggest that consumption is influenced by wealth transformed from income.…”