House price convergence: a Melbourne case study

This study explores patterns of convergence/divergence in Australian house prices across four price tiers of the Melbourne metropolitan housing market. The data covers a 20 year period (1990-2010) that spans two housing cycles. To derive a measure of house price appreciation, the research methodology divided houses into four tiers based on price and then apply the Case-Shiller Weighted Repeat Sales (WRS) Index, which contains a Generalised Least Squares (GLS) correction for periods of heteroscedasticity. The results showed that during periods of slow growth in the housing market, there are no discernible patterns of divergence between houses in low and high priced tiers. However, during periods of strong growth, houses in the lowest tier experience lower rates of capital appreciation than houses in other tiers, so the gap between low and high priced houses increased.