House prices dynamics and property bubble analysis in Australia and China

Research questions This research presents empirical evidence regarding house price dynamics and the risk of housing bubbles within the Australian and Chinese housing markets. Specifically, it explores the spillover effects which affect house prices and the risk of housing bubbles in both contexts. Additionally, it offers empirical evidence of regional house prices dynamics, citing the various influences of macroeconomic factors and ripple effects on house prices in Australia's four largest cities (Sydney, Melbourne, Brisbane and Perth) . Finally, the research offers a unique exploration of the macroeconomic impacts on house prices in the five first - tier cit ies and top eight second - tier cities in China, as well as explaining the spillover effects from house prices between major cities in both these major segments of the housing market in China Econometric techniques Using a broad range of house price indexes and various macroeconomic data for the period from 1995Q4 to 2015Q3 in Australia and the period from Q22007 to Q3 2015 in China, a combination of advanced time series methods was employed to perform econometric estimates. These methods included Ordinary Least Squares (OLS) , principal components technique, V ector Error Correction Model (VECM ), Johansen c o - integration, variance decomposition, generalised impulse r esponse and the Granger causality test. Findings The thesis suggests Australian house prices are driven by four key factors: mortgage interest rates (IR) , consumer sentiment (CS) , the Australian S&P/ASX 200 stock market index (AUSHARE) , and unemployment rate (UNEMPLOY) . These four key drivers are found to exhibit long - term relationships with house prices, such that short - term disequilibria are always corrected by economic forces; thus, no bubbles are identified in Australia ( see Chapter 8) . Similarly, in the Chinese context, short - term disequilibria are always corrected by economic forces to achieve a balanced house price equilibrium, leading to the conclusion that there is no housing bubble in China either ( see Chapter 7) . Both countries' housing price performance react strongly to mortgage interest rates and share market performance, reflecting both the importance of house financing and the close relationship between the share market and the real estate market. Moreover, a further main driver of Chinese house prices was determined to be GDP performance. Heterogeneity in terms of the relationship between house prices and macroeconomic variables was identified. Turning attention to the spillover effects between China house prices and Australian house prices, the reported finding suggest s the house price in China Granger causes Australian house prices ; however, this is not significant. The finding suggested that Chinese buyers' large purchase activities were not drivers of Australian house prices during the most recent housing boom. Furthermore, the general impulse response test suggests that Australia n house prices had a significant positive impact on China's house prices over the 10 quarters tested. This result is further confirmed by the variance decomposition test. The results may relate to the close business relationships between the Australianand Chineseeconomy, resulting from the attractive educational opportunities in Australia and the appeal ofAustralian properties, combined with Chinese people's growing purchasing power. Noeffectsbetween the two countries' house prices were noted, since house prices in China and Australiahave no long term history of co-integration.The next key finding was that Sydney is the dominant source responsible for causing aspilloverin house prices in Australia's four largest cities. This means thatchanges in houseprices in Sydney result in contagious spilloveroutcomes that impactimpacting the houseprices in the other three major cities, due to the mechanisms for transmission of information.Sydney is also the main driver of Australian house prices nationally. The Melbourne houseprice is largely influenced by contagious spillovereffects from other regions. Moreover, asshort term disequilibria always self-correct, the empirical results offer evidence that long-runrelationships exist between macroeconomic variables and house prices in all of the big fourcities. However, heterogeneity was found in terms of macroeconomic effect on the four targetcities' house prices.Finally, with regard to China, the empirical findings reveal that house prices in the topeightsecond-tier cities cause first tier house price movements over the short term, while first-tiercities such as Beijing and Shanghai, and second-tier city Chongqing, function as a source ofspillovers. Spillovereffects occur among all of the target cities in China, due to the co-integration between house prices in China's major cities, in both its first tierand second-tierhousing markets.