The role of price spillovers in the Australian housing crisis: A two-market analysis

Australia's soaring housing prices have intensified affordability concerns, with a key emerging issue being the widening price gap between houses and units. While prior spillover studies primarily examined how housing booms spread between cities, this research introduces a novel two-market spillover model that augments the traditional Diebold-Yilmaz framework to capture both house-unit spillover disparities and cross-market interactions within and across capital cities. Our findings reveal that skyrocketing house prices generate significantly stronger spillovers than units, reinforcing their dominant role in driving market-wide fluctuations. Moreover, intercity house spillovers exceed intra-city effects, highlighting the systemic nature of price transmission across regions. Given these insights, policy efforts should focus on mitigating overheated intercity house spillovers (demand-side measures), rather than attributing affordability challenges solely to unit supply shortages. This study provides a new empirical foundation for understanding housing market volatility and guiding more effective regulatory interventions.