PPMP20015: Literature Review on Drivers of Housing Price Growth

This literature review provides an overview of the factors influencing housing price growth, particularly in the Australian context. It examines long-run drivers, focusing on the interplay between demand and supply in the housing market, demographic shifts, and economic growth. Short-term factors such as interest rates, investment demand, economic climate, and institutional factors, including financial deregulation and land supply regulations, are also discussed. The review references various studies and models to explain the dynamics of housing prices, offering a comprehensive understanding of the key elements that contribute to price fluctuations and affordability challenges in the Australian housing market. Desklib offers a wealth of similar documents and study tools for students.

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Literature Review
Introduction
According to Hulse and Yates (2017) housing is considered to be an important factor for
all people. The fundamental need of living is shelter. Ownership of home is key element for
living standards. Home provides independence, privacy as well as security. The people of
Australia places high importance to the ownership of home which is considered as most stable
form of life and wealth creation. Governments of Australia encourages ownership of home by
providing direct grants to the home buyer for first time. About 70% of total population in
Australia lives in the dwellings that are occupied by owners. Out of this, only 50 % of the
dwellings own a house without mortgage loan and other have loans (Maloutas 2016). About 28%
of the population of Australia lives in a rented accommodation as well as three quarters of the 28
% of the private land lords.
Home ownership is an important for all the Australians as housing factor has become an
unaffordable factor in many Australian citires gradually. The established price of the houses
have increased by 110% in the last five years (Troy 2018). So, rental housing has become an
important factor of the people who live in Australia. Details of the price growth of housing are
discussed in this part along with the underlying demand as well as supply for new housing. The
factors that affects the housing price are also included in this literature review.
Long-run Drivers in Housing Price Growth
Framework
According to Plakandaras et al. (2015) the price of an asset or a good is determined by
the demand as well as supply graph. The demand as well as supply factors are to be kept in

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consideration for the framework. One of the framework that is included in the supply demand
network is that there are many approaches and those approaches helps in joint consideration of
demand as well as supply stock flow model in housing market. The framework helps to capture
all dynamic interaction in between the housing demand, prices, as well as supply of housing
market over time.
Favilukis, Ludvigson and Nieuwerburgh (2017) stated that stock flow model of the
demand supply gap, the demand for housing asset; for both for the occupiers and the investors
are inversely proportional to price as well as the user cost. The demand is directly proportional to
the rent. There are other variables also that plays an important role that includes demographic
factors, the total income of the households, as well as cost of the credit and access of the credit in
the household. This comprises various models that are in demand. A model that consists of
housing that is directly related to owning a house with the cost of renting. The cost of user is
mainly dependent on real rate of interest, the running costs, decreasing the asset as well as the
expected real rate of price appreciation of housing.

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Figure 1: Stock-Model Diagram
(Source: Waltl 2018)
Underlying Demand as well as Supply of the New Housing
Underlying Demand for the Housing
Melser and Hill (2018) stated that the demand of the new dwellings are thought as
representing the demand for all the new housing that are built. The rate of population growth as
well as the estimate of the household size are observed. This demand is a long level run demand
which abstracts many shorter term influencing the household demand connected with the
business cycle. The underlying demand is not observable (Hill and Melser 2017). This demand
mainly has three components. One component is demanding for newly made households,
demanding for new dwellings for replacing demolished ones as well as the demand for vacant or
for some second homes. This is shown in the figure 2. The most demand for new dwellings are
replacing the smaller ones and the demanding for empty or second homes are stable contributors
of the underlying demand with comparison to the other component of underlying demand. The
rate for the household formation reflects the interaction in between the population growth as well
as for the household size.

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Figure 2: Components related to Underlying Demand
(Source: Kohler and Van Der Merwe 2015)
Annual supply as well as demand gap
Baur and Heaney (2017) stated when supply and the demand gap is generally compared
with estimates of underlying demand, or completions analyzed of supply is slow, or is unable in
responding significant increase of the demand. The gap in between the demand of new dwellings
and supply of new dwellings have become very smaller in Australia. This is shown below in
figure 3. There was a percentage gap which is accounted for the developments of the dwellings
in NSW. In Queensland and in the Western Australia, the underlying difference in between
demand as well as the supply gap estimates of the demand that are underlying are in state level
are main subject to the larger uncertainty when compared with the demand in national level.
This is because most of the assumptions are done on household formation that are very less in
holding at the disaggregated level. The new supply that is in NSW has raised sharply because of
the consistent string underlying demand.
Figure 3: Underlying Demand and Supply Gap

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(Source: Kohler and Van Der Merwe 2015)
Factors that affects the Housing Price
Short Term Factors
Interest Rates in Short Term Factors
In economy of Australia, interest rates rapidly fell in the year 1980s because of economic
recession (Melser 2017). The rise in Australia was moderate during the year 1955 – 1996. And
after that, the interest rate fell again till 2003. The low interest rate over past years resulted in rise
of housing price in Australia. As by Kohler and Van Der Merwe (2015), the mortgage rate of
interest has short term effects as well as long term effects on the real price of inflation.
Investment Demand in Short Term Factors
Hulse and Yates (2017) stated that the tax benefits, the underlying factors that are socio-
demographic, all the institutional reforms, larger developments in economy, the increasing
income of rents, and the contributed capital markets are mainly responsible for the increased
investment demand for the housing. There was a downward correction that is mainly observed
for equity market in world in the mid of 2000. This can cause capital switch from the share t
many assets such as real estate and the bonds. There was increase in the flow of all private
investment of debt financed in residential property which occurred in the perception investment
in property at risk as well as return terms.
Economic climate in Short Term Factors
The economic condition in Australia is basically good. The inflation of Australia was
under control and there was unemployment rate that was falling continuously in Australia. The

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overall income of the citizen in Australia was rising (Troy 2018). So the sentiments among the
investors and the owners occupied were basically very strong. These factors helped to increase
the demand of housing in Australia. The unemployment has many effects on housing prices both
in long term as well as the short term.
Institutional Factors
Financial deregulation as well as innovation in Institutional Factors
In the year 1980, the financial system of Australia deregulated. There was very direct
controls of government of the leading activities in the financial institutions such as banks were
closed (Plakandaras et al. 2015). As a result, the new lending as well as other institutions which
includes funds of industry superannuation, originators, mortgage brokers, originators, and
foreign banks that are in the market for the housing finance. These factors increased the housing
source in Australia.
Land supply as well as the land usage planning system in Institutional Factors
The price of housing and the affordability connected with the price of land are mainly
determined as supply of the development in urban land. Residential supply of land is changed by
the factors which includes development cost, relative return from all uses related to housing and
rules, the land development industry structure, as well as land effectiveness usage planning
system that is used (Favilukis, Ludvigson and Nieuwerburgh 2017). The returns from using the
non-housing sectors and rules as well as the effectiveness of the land usage are also determined
in these factors. There are control over using of land and availability of the land that developed
and the land cost have increased the price of housing price in Australia.
Government taxes, levies and charges in Institutional Factors

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The government of Australia implies taxes, charges, as well as levies for developing and
the use of the urban land (Kohler and Van Der Merwe 2015). These costs have increased price of
house in Australia. The costs that are involved are developer levies, stamp on the duty of sales as
well as transferring the land and tax of the land. The construction of new house as well as the
renovation of house has also increased the rate of house.
Long-term factors
Demography
The demographic factors that are included in housing price in long run are increasing
growth of population which increases total number of housel holds in a country (Maloutas 2016).
The increased population helps to increase the cost of housing in Australia. The total population
of Australia has increased to 20.7 million according to survey in the year 2005 to 2006.
Changing of economic roles are also involved in demographic factors in increasing the housing
demand.
Economic Growth
Household income and the housing demand are related to each other. In Australia, the
demand of housing in always greater in Australia (Plakandaras et al. 2015). So, the demand for
the housing also increases with all proper income.

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References
Baur, D.G. and Heaney, R., 2017. Bubbles in the Australian housing market. Pacific-Basin
Finance Journal, 44, pp.113-126.
Favilukis, J., Ludvigson, S.C. and Van Nieuwerburgh, S., 2017. The macroeconomic effects of
housing wealth, housing finance, and limited risk sharing in general equilibrium. Journal of
Political Economy, 125(1), pp.140-223.
Hill, R.J. and Melser, D., 2017. Residential Real Estate, Risk, Return and Home Characteristics:
Evidence from Sydney 2002-14. Reviewed Papers.
Hulse, K. and Yates, J., 2017. A private rental sector paradox: unpacking the effects of urban
restructuring on housing market dynamics. Housing studies, 32(3), pp.253-270.
Kohler, M. and Van Der Merwe, M., 2015. Long-run trends in housing price growth. Reserve
Bank Bulletin, pp.21-30.
Maloutas, T., 2016. Introduction: Residential segregation in context. In Residential segregation
in comparative perspective(pp. 17-52). Routledge.
Maloutas, T., 2016. Introduction: Residential segregation in context. In Residential segregation
in comparative perspective(pp. 17-52). Routledge.
Melser, D. and Hill, R.J., 2018. Residential Real Estate, Risk, Return and Diversification: Some
Empirical Evidence. The Journal of Real Estate Finance and Economics, pp.1-36.
Melser, D., 2017. Residential Real Estate, Risk, Return and Home Characteristics: Evidence
from Sydney 2002-14 (No. eres2017_296). European Real Estate Society (ERES).

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Plakandaras, V., Gupta, R., Gogas, P. and Papadimitriou, T., 2015. Forecasting the US real house
price index. Economic Modelling, 45, pp.259-267.
Troy, L., 2018. The politics of urban renewal in Sydney’s residential apartment market. Urban
Studies, 55(6), pp.1329-1345.
Waltl, S.R., 2018. Estimating quantile-specific rental yields for residential housing in
Sydney. Regional Science and Urban Economics, 68, pp.204-225.