Housing prices in Sydney have increased rapidly in the past three decades. This leads to a debate of whether Sydney housing prices have departed from macroeconomic fundamentals. However, little research has been devoted to this area. Therefore, this study aims to fill this gap by examining the long-run association between housing prices and market fundamentals. Further, it also examines the long-run determinants of housing prices in Greater Sydney.
The analysis of this study involves two stages. The first stage is to estimate the presence of long-run relationship between housing prices and market fundamentals with the Johansen and Juselius Cointegration test. Thereafter, the determinants of housing prices in Greater Sydney is assessed by using a vector error correction model.
The empirical results show that Sydney housing prices are cointegrated with market fundamentals in the long run. In addition, there is evidence to suggest that market fundamentals such as gross disposable income, housing supply, unemployment rate and gross domestic product are the key long-run determinants of Sydney housing prices, reflecting that Sydney housing prices, in general, can be explained by market fundamentals in the long run.
The findings enable more informed and practical policy and investment decision-making regarding the relation between housing prices and market fundamentals.
This paper is the first study to offer empirical evidence of the degree to which the behaviour of housing prices can be explained by market fundamentals, from a capital city instead of at a national level, using a relatively disaggregated dataset of housing price series for Greater Sydney.
This paper is written based on the findings of the Master Thesis of Md Abdullah Al-Masum entitled of “Modeling Housing Market Fundamentals: Evidence from the Sydney Housing Market” at Western Sydney University. The authors would like to acknowledge the support from Western Sydney University.
Al-Masum, M.A. and Lee, C.L. (2020), "Modelling housing prices and market fundamentals: evidence from the Sydney housing market", International Journal of Housing Markets and Analysis, Vol. 12 No. 4, pp. 746-762. https://doi.org/10.1108/IJHMA-10-2018-0082
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