An econometric time-series analysis of Australian housing activity from a macroeconomic perspective

Abstract

The significant fluctuations in housing activity over time can be regarded as "interesting" and "special". The persistence of such cyclical behaviour of housing activity through periods of different economic and demographic conditions has attracted significant research efforts to investigate the underlying influences and the implications for the economy as a whole. In this thesis, the factors which contribute to cyclical fluctuations in housing activity are examined using econometric time-series techniques. While the commonly used indicators of housing activity are stationary over the sample period investigated, most important economic and financial variables which significantly influence housing activity can be characterised as co-integrated of order (1, 1). A new procedure is therefore developed and utilised widely for examination of such systems which contain both co-integrated and stationary series. This procedure is an innovative way of analysing housing activity as the "error-correction" like processes generated from the co-integrated economic and financial variables form an important part of the system in explaining the cyclical fluctuations in housing activity. In this thesis, it is shown that the fluctuations in housing activity are related to the policy instruments used by the Government for stabilising the macroeconomy. In particular, housing activity is found to respond significantly to changes in short term interest rates and real income, or general economic activity, although the effects resulting from changes in the money supply and general price level are much less substantial. While the response of housing activity to a change in short term interest rates is prolonged, the effect of innovations in real income, or general economic conditions, on housing activity only persists for a much shorter period. In addition, policy on immigration is also an important element influencing the level of housing activity. However, over the short to medium terms, changes in economic and financial variables produce more significant effects on housing activity than that generated by net migration or increases in population. Interestingly, housing activity also feeds back on the level of short term interest rates, which suggest that housing activity may be an important determinant in the decision-making processes of the monetary authorities. In contrast to previous testing for Australia, housing activity is found to "Granger cause" general economic growth in a number of modelling exercises. These results consistently affirm that housing activity contains leading information for changes in general economic conditions and, therefore, can be used as a "leading indicator" of general economic activity. Show more