The Growth of House Prices in Australian Capital Cities: What Do Economic Fundamentals Explain?

14 Pages Posted: 1 Oct 2007

See all articles by Glenn Otto

Glenn Otto

UNSW Australia Business School, School of Economics

Abstract

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.

Suggested Citation

Otto, Glenn, The Growth of House Prices in Australian Capital Cities: What Do Economic Fundamentals Explain?. Australian Economic Review, Vol. 40, No. 3, pp. 225-238, September 2007. Available at SSRN: https://ssrn.com/abstract=1017932 or http://dx.doi.org/10.1111/j.1467-8462.2007.00453.x

Glenn Otto (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

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