Two Countries, Sixteen Cities, Five Thousand Kilometres: How Many Housing Markets?

We test whether a single housing market exists across sixteen cities covering two countries, Australia and New Zealand. Distances between these cities are vastly greater than commuting distances. We define a single housing market as one in which a single stochastic trend describes the long run path of real house prices in all cities. A strong form single housing market occurs when an innovation to the stochastic trend affects house prices across all cities multiplicatively to an equal degree. A weak form occurs when an innovation to the stochastic trend affects house prices in all cities, but not to an equal degree. We find that the sixteen housing markets are characterised by a weak form single housing market. The dynamic structure of adjustment reveals three groups of cities. House price shocks are first reflected in the price dynamics of a leading group of Australian cities (including Melbourne and Sydney), then flow to a group of follower cities comprising peripheral Australian and major New Zealand cities, and then to a group of laggard cities within New Zealand. Our theoretical model demonstrates how a weak form single housing market may arise due to differences between cities in house price responses to land prices, migration responses to house prices and/or land price responses to migration flows.