Big City Difference? Another Look at Factors Driving House Prices

The purpose of this paper is to re‐examine the issue of whether inter‐urban housing markets can be modelled using a set of common economic fundamentals (such as economic growth, employment and the like). This is a timely analysis in view of the current widespread interest in housing markets as a result of the fall‐out from the housing sub‐prime crisis in the United States. House prices and economic fundamentals within each city are tested for cointegration and, in the event of a cointegrating relationship being found, restriction tests are applied to ascertain whether particular economic fundamentals can be excluded from the long‐run equilibrium house price model for that city, and whether the given fundamental contributes to speed of adjustment back to equilibrium once a disturbance has taken place. This allows a test of whether the given factor/s can be considered a long‐run driver/s of house prices in each city. The main finding is that there are clear differences across Australian state capitals in long‐run driving factors for house prices.