House prices and financial liberalisation in Australia

Williams, David M (2009): House prices and financial liberalisation in Australia. Published in: Oxford University Department of Economics Working Paper Series , Vol. 2009, No. 432 (May 2009)

Abstract

Financial liberalisation and innovation (FLIB) in Australia over the 1980s and 1990s provided the institutional backdrop for one of the most rapid increases in household balance sheets and house prices in the world. An equilibrium correction model of quarterly Australian house prices for 1972-2006 identifies the key long run drivers as real non-property income per house, the working age population proportion, the unemployment rate, two government policy changes, real and nominal interest rates and non-price credit conditions. All else equal, easing credit supply conditions attributable to FLIB directly raised the long run level of real house prices by around 51 per cent while higher real interest rates subtracted 29 per cent from long run prices. Real interest rates are shown to have a significant impact on real house prices after financial liberalisation but play no role before. These findings suggest that FLIB fundamentally relaxed binding credit constraints on households and enhanced opportunities for intertemporal smoothing. The model also explicitly captures short run overshooting dynamics in Australian house prices. Whenever lagged real house price growth is greater than about 4 per cent, for example during booms, house prices tend to display "frenzy" behaviour measured as a cubic of lagged house price changes.

• Item Type: MPRA Paper
• Language: English
• Keywords: House prices; Mortgage markets; Financial liberalisation
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Abelson, P. and R. Joyeaux, G. Milunovitch and D. Chung (2005). "Explaining House Prices in Australia: 1970-2003." Economic Record 81(0): S96-103.

Abraham, J. M. and P. H. Hendershott (1996). "Bubbles in Metropolitan Housing Markets." Journal of Housing Research 7(2): 191-207.

Abraham, J. M. and P. H. Hendershott (1993). "Patterns and Determinants of Metropolitan House Prices 1977-1991" in Real Estate and the Credit Crunch. L. E. Browne and E. S. Rosengren. Boston, Federal Reserve Bank of Boston: 18-42.

Aron, J. and J. Muellbauer (2006). "Housing Wealth, Credit Conditions and Consumption." Centre for the Study of African Economies WPS/2006-08, Oxford.

Australian Bureau of Statistics Catalogue Numbers: 3101; 3222; 4102; 5204; 5205; 5206; 5609; 6202; 6401; 6416; 6417; 6464.

Bacchetta, P. and S. Gerlach (1997). "Consumption and Credit Constraints: International Evidence." Journal of Monetary Economics 40:207-238.

Banerjee, A, Dolado, J, .Hendry, D. and G. Smith (1986). "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence." Oxford Bulletin of Economics and Statistics 48(3): 253-77.

Bayoumi, T. (1993). "Financial Deregulation and Consumption in the United Kingdom." The Review of Economic Studies 75(3): 536-539.

Blinder, A. and A. Deaton (1985). "The Time Series Consumption Function Revisited." Brookings Papers on Economic Activity 0(2), 465-511.

Bodman, P. M. and M. Crosby (2003). "How Far to Fall? Bubbles in Major City House Prices in Australia." Melbourne Business School Working Paper.

Bourassa, S. C. and P. H. Hendershott (1995). "Australian Capital City Real House Prices, 1979-1993." Australian Economic Review 0(111): 16-26.

Buckley, R. and J. Ermisch (1982). "Government Policy and House Prices in the United Kingdom: An Econometric Analysis." Oxford Bulletin of Economics and Statistics, 44(4), 273-304.

Cameron, G, Muellbauer, J. and A. Murphy (2006). "Was There A British House Price Bubble? Evidence From A Regional Panel." Centre for Economic Policy Research (CEPR) Discussion Paper 5619.

Cho, M. (1996). "House Price Dynamics: A Survey of Theoretical and Empirical Issues." Journal of Housing Research 7(2): 145-72.

Chowdhury, M. and G. Mallik (2004). "Effects of Housing Allowances on Housing Prices in Australia: A Cointegration Analysis." Economic Analysis and Policy 34(1): 37-51.

Commonwealth Treasury (2005). Tax Expenditures Statement, CanPrint Communications, Canberra.

Doornik, J.A. (2007). An Introduction to OxMetrics 5. London, Timberlake Consultants Press.

Dougherty, A. and R. Van Order (1982). "Inflation, Housing Costs, and the Consumer Price Index." American Economic Review 72(1): 154-64.

Ellis, L. and D. Andrews (2001). "City Sizes, Housing Costs, and Wealth," Reserve Bank of Australia Research Discussion Paper No. 8, 2001.

Fernandez-Corugedo, E. and J. Muellbauer (2006). "Consumer Credit Conditions in the U.K." Bank of England Working Paper No. 314.

Hendry, D. F. (1984). "Econometric Modelling of House Prices in the United Kingdom." Econometrics and Quantitative Economics, (ed. D.F. Hendry and K.F. Wallis). Oxford: Basil Blackwell.

Hendry, D. F. (1995). "Dynamic Econometrics." Oxford University Press, Oxford, United Kingdom.

Hendry, F. D. and H.-M. Krolzig (2001). Automatic Econometric Model Selection Using PcGets 1.0. London, Timberlake Consultants Press.

Jappelli, T. and M. Pagano (1989). "Consumption and Capital Market Imperfections: An International Comparison." The American Economic Review 79(5): 1088-1105.

Jevons, W. (1884). Investigations in Currency and Finance, Macmillan Publishers, London.

Jorgenson, D. (1963). "Capital Theory and Investment Behaviour." American Economic Review, 53(2), 247-259.

Keynes, J. (1936). The General Theory of Employment, Interest and Money. Macmillan Cambridge University Press.

Koopman, S. J., A. C. Harvey, J.A Doornik and N. Shephard (2000). Stamp: Structural Time series Analyser, Modeller and Predictor. London, Timberlake Consultants.

Kremers, J. J. M. (1989). "U.S. Federal Indebtedness and the Conduct of Fiscal Policy." Journal of Monetary Economics 23(2): 219-38.

Kremers, J. J. M., N. R. Ericsson and J. Dolado (1992). "The Power of Cointegration Tests", Oxford Bulletin of Economics and Statistics 54(3): 325-48.

Lucas, R. E. Jnr (1972). "Expectations and the Neutrality of Money." Journal of Economic Theory 4(2): 103-24.

Lucas, R. E. Jnr (1973). "Some International Evidence on Output-Inflation Tradeoffs." American Economic Review 63(3): 326-34.

Mankiw, N. G. and D. N. Weil (1989). "The Baby Boom, the Baby Bust, and the Housing Market." Regional Science and Urban Economics 19(2): 235-58.

Meen, G. (1990). "The Removal of Mortgage Constraints and the Implications for Econometric Modelling of UK House Prices." Oxford Bulletin of Economics and Statistics, 32(1): 1-23.

Meen, G. (1996). "Ten Propositions in UK Housing Macroeconomics: An Overview of the 1980s and Early 1990s." Urban Studies 33(3): 425-44.

Meen, G. (2000). "Housing Cycles and Efficiency." Scottish Journal of Political Economy, 47(2), 114-40.

Meen, G. (2002). "The Time-Series Behaviour of House Prices: A Transatlantic Divide?" Journal of Housing Economics 11(1): 1-23.

Morris, S. and H. S. Shin (2002). "Social Value of Public Information." American Economic Review 92(5): 1521-1534.

Muellbauer, J. (1994). "The Assessment: Consumer Expenditure." Oxford Review of Economic Policy, 10(2), 1-41.

Muellbauer, J. and R. Lattimore (1995). "The Consumption function: A Theoretical and Empirical Overview" in Pesaran, M. H. and M. R. Wicks, Handbook of Applied Econometrics, Vol 1, Blackwells Publishers, Oxford.

Muellbauer, J. and A. Murphy (1997). "Booms and Busts in the UK Housing Market." Economic Journal 107(445): 1701-27.

OECD (2005). "Recent House Price Developments: the role of fundamentals." OECD Economic Outlook 78.

Oster, A. (2005). "House Prices - Drivers and Links to the Broader Economy: Rational or Irrational Exuberance," Shann Memorial Lecture, University of Western Australia.

Otto, G. (2007). "The Growth of House Prices in Australian Capital Cities: What Do Economic Fundamentals Explain?" The Australian Economic Review, 40(3), 225-38.

Phelps, E. S. (1970). "Introduction" in Microeconomic Foundations of Employment and Information Theory, E.S. Phelps et al eds., Norton Publishers, New York.

Poterba, J. M. (1984). "Tax Subsidies to Owner-occupied Housing: An Asset-Market Approach." Quarterly Journal of Economics 99(4): 729-52.

Poterba, J. M. (1991). "House Price Dynamics: The Role of Tax Policy and Demography." Brookings Papers on Economic Activity 0(2): 143-83.

REIA (September 2004). "Market Facts: A Quarterly Review of Major residential Property Markets in Australia", Canberra.

RBA Bulletin Data: Tables B06; D01; D05; F01; F05; F07.

RBA (2007) Financial Stability Review (March), Sydney.

Real Estate Institute of Australia (2004). "Market Facts: a quarterly review of major residential property markets in Australia" (September), Canberra.

Scott, A. (1996). "Consumption, `Credit Crunches' and Financial Deregulation." Centre for Economic Policy Research, Discussion Paper No 1389.

Shefrin, H. M. and R. H. Thaler (1988). "The Behavioural Life-Cycle Hypothesis." Economic Inquiry 26(4): 609-43.

Tu, Y. (2000). "Segmentation of Australian Housing Markets." Journal of Property Research 17(4): 311-327.

Wallis, S., B. Beerworth, et al. (1997). Financial System Inquiry Final Report, Australian Government Printing Service.