Fundamentals of House Price Inflation
There is a remarkable coincidence between Q3 capital city house price growth and growth in state final demand, as recorded in the Q3 national accounts. House prices in Sydney have recorded the largest decline of the capital cities at -4.7% y/y. NSW also saw the weakest growth in state final demand of 2.3% y/y.
The two cities with the strongest annual house price growth were Darwin, NT at 21.9% y/y and Perth, WA at 17.7% y/y. These just happen to be the capitals of the mainland states that recorded the strongest growth in state final demand at 13.6% y/y and 6.7% y/y respectively.
This is an interesting test of causality. It has been common for analysts to attribute moderating economic growth nationally to a wealth effect from more subdued growth in house prices. Yet we know that economic growth in WA and NT is benefiting strongly from the global boom in commodity prices, a development that is entirely exogenous to the domestic economy. This would strongly suggest that it is broader economic developments that are driving house prices, not the other way around. On a state-by-state basis, house prices would seem to have a firm connection with fundamentals.
posted on 07 December 2005 by skirchner
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