Australian housing markets: local, regional and international interactions

<p>Real estate is an illiquid asset which cannot be substituted among geographic regions. This might prompt the belief that separate housing markets are separately driven. However, recent evidence suggests otherwise. The importance of this issue becomes apparent when one deals with a portfolio of real estate assets and when considering housing-related policies at national or regional levels. Studying housing market interactions is not a straightforward task. The aggregation level and the dominance of local or common factors in price determination influence the interactions level and its examination. In this research, I explore the price co-movements of housing markets, in terms of three specific and interrelated pieces of empirical research: suburban level housing market  interactions, housing market interactions at regional (state) level, and international developments in housing market interactions.</p> <p>At the suburban level, the primary focus is to expand the notion of "closeness" of regions to beyond the spatial proximity and include "socio-spatial" proximity to explore the dynamics of suburban house prices. I propose to apply a higher-order spatial autoregressive (HOSAR) model, and to take a more general perspective on what is meant by the "closeness" of regions. I illustrate the model by considering the evolution of home prices in Melbourne, Australia, from 2007 to 2018. I find that the HOSAR model provides a better representation of housing prices dynamics at the suburban level and new insights into the way spatial shocks are transmitted around the city.</p> <p>At the regional level the focus is on Australia's housing market. Like most national markets, it is made up of several regional sub-markets. How these regional markets interact is not well understood but is relevant to macroeconomic policy setting. I outline and estimate a flexible global vector autogregressive (Global VAR or GVAR) model using quarterly data on house prices, output, unemployment and population for the eight Australian states and territories from 1986 to 2016. Using region-to-region impulse response functions from this model, I quantify the influence of shocks in one region on another. The results highlight the high degree of influence of New South Wales (NSW) on other regions over and above its size.</p> <p>The third part of the research is on international developments in housing market interactions. There is a growing appreciation of the impact that globalisation has had on enhancing the interlinkages between economies and societies, especially through migration. This raises the question as to whether migration could be a channel linking local housing markets to the world. In light of this, I investigate whether the "foreign-born" in one country---that is, the stock of previous immigrants---act as a conduit for economic changes abroad to impact local housing markets. I look at disaggregated regions in Australia and construct a measure of the average performance of the motherland economies of the foreign-born for each region. I find evidence that house prices and rental growth tend to fall when motherland economies are performing well. This effect is economically meaningful, robust and appears to represent a distinct effect from that via the immigration channel.</p>