Two Countries, Sixteen Cities, Five Thousand Kilometres: How Many Housing Markets?

Motu Working Paper 16-04

29 Pages Posted: 9 Apr 2016

See all articles by Ryan Greenaway-McGrevy

Ryan Greenaway-McGrevy

University of Auckland - Department of Economics

Arthur Grimes

Motu Economic and Public Policy Research Trust

Mark J. Holmes

University of Waikato - Management School, Department of Economics

Date Written: March 29, 2016

Abstract

We test whether a single housing market exists across sixteen cities covering two countries, Australia and New Zealand. Distances between these cities are vastly greater than commuting distances. We define a single housing market as one in which a single stochastic trend describes the long run path of real house prices in all cities. A strong form single housing market occurs when an innovation to the stochastic trend affects house prices across all cities multiplicatively to an equal degree. A weak form occurs when an innovation to the stochastic trend affects house prices in all cities, but not to an equal degree. We find that the sixteen housing markets are characterised by a weak form single housing market. The dynamic structure of adjustment reveals three groups of cities. House price shocks are first reflected in the price dynamics of a leading group of Australian cities (including Melbourne and Sydney), then flow to a group of follower cities comprising peripheral Australian and major New Zealand cities, and then to a group of laggard cities within New Zealand. Our theoretical model demonstrates how a weak form single housing market may arise due to differences between cities in house price responses to land prices, migration responses to house prices and/or land price responses to migration flows.

Keywords: R21, R31

JEL Classification: House Prices; Convergence; Single Housing Market; Australia; New Zealand

Suggested Citation

Greenaway-McGrevy, Ryan and Grimes, Arthur and Holmes, Mark J., Two Countries, Sixteen Cities, Five Thousand Kilometres: How Many Housing Markets? (March 29, 2016). Motu Working Paper 16-04, Available at SSRN: https://ssrn.com/abstract=2759650 or http://dx.doi.org/10.2139/ssrn.2759650

Ryan Greenaway-McGrevy

University of Auckland - Department of Economics ( email )

Private Bag 92019
Auckland
New Zealand

Arthur Grimes (Contact Author)

Motu Economic and Public Policy Research Trust ( email )

19 Milne Terrace
Island Bay
Wellington 6002
New Zealand

Mark J. Holmes

University of Waikato - Management School, Department of Economics ( email )

Hamilton
New Zealand

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