A single Australasian housing market?

New research is out from Motu looking at whether the major cities in Australasia make up a single housing market, and what that means for housing prices and policies.

Two countries, sixteen cities, five thousand kilometres: How many housing markets?
Ryan Greenaway-McGrevy, Arthur Grimes, Mark Holmes
Motu Working Paper 16-04, March 2016

This paper examines whether the major cities in Australasia make up a single housing market. If there is a single housing market across both countries, then Kiwi and Aussie house prices are primarily being driven by the same forces, rather than by local factors. In addition, a single housing market would imply that macroeconomic policies in the two countries are either run on similar lines or are incapable of independently controlling real house prices, despite both countries running independent monetary and fiscal policies.

The authors 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 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.

The authors found that the 16 city housing markets are characterised by a weak form single housing market. House price shocks are first reflected in the price dynamics of a leading group of Australian cities (including Melbourne, Sydney, Adelaide, Canberra, Brisbane), then flow to a group of follower cities comprising peripheral Australian and major New Zealand cities (Perth, Hobart, Wellington, Auckland, Darwin), and then to a group of cities within New Zealand (Dunedin, Christchurch, Palmerston North, Hastings, Tauranga, Hamilton).

In this weak form of a single housing market, house prices in cities across Australasia will diverge over time, but are influenced by the same long-term factors.

Divergence may be caused by differences in house price responses to land prices, migration responses to house prices or to land price responses to migration flows. The latter may reflect either geographical or planning constraints. These constraints may affect how much land is available and therefore how land prices respond to population flows (i.e. to migration).

The authors found little evidence that the countries’ independent monetary and/or other macro-economic policies have been instrumental in determining long run real house price outcomes in either country.

The MBIE-funded Resilient Urban Futures programme provided financial assistance for this work.