The Relationship Between Economic Environment and Housing Market Dynamics

The housing sector is an important pillar of the economy. Understanding the trend and factors influencing it is essential for effective policy formulation and purchasing decisions. The objectives of this study are to assess the performance trajectory of the Australian housing market and to identify key macroeconomic factors influencing it over the past two decades. The presence of structural shifts in the housing market due to changing economic conditions highlights the importance of examining both short-run adjustments and long-run equilibrium relationships; however, limited recent studies have investigated these evolving dynamics, which this study addresses by employing the cointegration and Vector Error Correction Model (VECM). Empirical findings indicated the dynamics of previous period RPPI, interest rates, population growth, COVID-19 dummy, and adjustment components (ECT) are affecting housing market dynamics but with effects varying across different lag periods. On the other hand, the long-run estimates reported variables including population growth, the COVID-19 pandemic, household income, and unemployment rate have a significant impact on RPPI at the 5% significance level. The finding of the error correction model suggests a gradual adjustment of short-term deviation with ECTt-1 = −0.078 towards the long-term equilibrium quarterly. To further validate the robustness of the results, an Impulse Response Function (IRF) analysis was performed. The empirical findings are valuable as they provide insights that assist policymakers in formulating housing policies and support investors and purchasers in making informed decisions.