Big City Difference? Another Look at Factors Driving House Prices

Abstract

The purpose of this paper is to re-examine the issue of whether inter-urban housing markets can be modelled using a set of common economic fundamentals (such as economic growth, employment and the like). This is a timely analysis in view of the current widespread interest in housing markets as a result of the fall-out from the housing sub-prime crisis in the United States. House prices and economic fundamentals within each city are tested for cointegration and, in the event of a cointegrating relationship being found, restriction tests are applied to ascertain whether particular economic fundamentals can be excluded from the long-run equilibrium house price model for that city, and whether the given fundamental contributes to speed of adjustment back to equilibrium once a disturbance has taken place. This allows a test of whether the given factor/s can be considered a long-run driver/s of house prices in each city. The main finding is that there are clear differences across Australian state capitals in long-run driving factors for house prices