Explaining House Prices in Australia: 1970–2003*

This paper aims to explain changes in real house prices in Australia from 1970 to 2003. We develop and estimate a long‐run equilibrium model that shows the real long‐run economic determinants of house prices and a short‐run asymmetric error correction model to represent house price changes in the short run. We find that, in the long run, real house prices are determined significantly and positively by real disposable income and the consumer price index. They are also determined significantly and negatively by the unemployment rate, real mortgage rates, equity prices and the housing stock. Employing our short‐run asymmetric error correction model, we find that there are significant lags in adjustment to equilibrium. When real house prices are rising at more than 2 per cent per annum, the housing market adjusts to equilibrium in approximately four quarters. When real house prices are static or falling, the adjustment process takes six quarters.