House Prices in Australia

HOUSE PRICES IN AUSTRALIA: 1970 TO 2003, FACTS AND EXPLANATIONS
Peter Abelson, Roselyne Joyeux,George Milunovich and Demi Chung

This paper describes and explains changes in real house prices in Australia from 1970 to 2003. In the first part of the paper, we develop a national index of real house prices. We then discuss the main factors that determine real house prices and some previous attempts to model Australian house prices. We develop and estimate a long-run equilibrium model that shows the real economic determinants of house prices and a short-run asymmetric error correction model to represent house price changes in the short run. Consistent with economic theory, we find that in the long run real house prices are related significantly and positively to real income and to the rate of inflation as represented by the consumer price index. They are also related significantly and negatively to the unemployment rate, 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 four quarters. When real house prices are static or falling, the adjustment process takes six quarters.