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House prices and financial liberalisation in Australia

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  • David M. Williams

Abstract

Financial liberalisation and innovation (FLIB) in Australia over the 1980s and 1990s provided the institutional backdrop for one of the most rapid increases in household balance sheets and house prices in the world. An equilibrium correction model of quarterly Australian house prices for 1972-2006 identifies the key long run drivers as real non-property income per house, the working age population proportion, the unemployment rate, two government policy changes, real and nominal interest rates and non-price credit conditions. All else equal, easing credit supply conditions attributable to FLIB directly raised the long run level of real house prices by around 51 per cent while higher real interest rates subtracted 29 per cent from long run prices. Real interest rates are shown to have a significant impact on real house prices after financial liberalisation but play no role before. These findings suggest that FLIB fundamentally relaxed binding credit constraints on households and enhanced opportunities for intertemporal smoothing. The model also explicitly captures short run overshooting dynamics in Australian house prices. Whenever lagged real house price growth is greater than about 4 per cent, for example during booms, house prices tend to display "frenzy" behaviour measured as a cubic of lagged house price changes.

Suggested Citation

  • David M. Williams, 2009. "House prices and financial liberalisation in Australia," Economics Series Working Papers 432, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:432
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    Cited by:

    1. Duca, John V. & Muellbauer, John & Murphy, Anthony, 2010. "Housing markets and the financial crisis of 2007-2009: Lessons for the future," Journal of Financial Stability, Elsevier, vol. 6(4), pages 203-217, December.
    2. repec:osf:osfxxx:8f67h_v1 is not listed on IDEAS
    3. Mr. Shengzu Wang & Ms. Patrizia Tumbarello, 2010. "What Drives House Prices in Australia? A+L4584 Cross-Country Approach," IMF Working Papers 2010/291, International Monetary Fund.
    4. Kieran McQuinn & Teresa Monteiro & Conor O’Toole, 2021. "House Price Expectations, Labour Market Developments and the House Price to Rent Ratio: A User Cost of Capital Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 62(1), pages 25-47, January.
    5. Veronica John Muellbauer & Veronica David M Williams, 2012. "Credit conditions and the real economy: the elephant in the room," BIS Papers chapters, in: Bank for International Settlements (ed.), Property markets and financial stability, volume 64, pages 95-101, Bank for International Settlements.
    6. de Silva, Ashton J & Boymal, Jonathan & Potts, Jason & Thomas, Stuart, 2015. "Does innovation in residential mortgage products explain rising house prices? No," MPRA Paper 62548, University Library of Munich, Germany.
    7. de Silva, Ashton J & Boymal, Jonthan & Potts, Jason & Thomas, Stuart, 2015. "The Residential Mortgage (De)regulation–Innovation nexus," MPRA Paper 62549, University Library of Munich, Germany.
    8. Andrea Ferrero, 2015. "House Price Booms, Current Account Deficits, and Low Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S1), pages 261-293, March.
    9. Munirul H. Nabin & Sukanto Bhattacharya & Shuddhaswatta Rafiq, 2015. "Mortgage-Backed Securities (MBS): Is It a Curse or a Blessing for the Australian Home Loan Market? A Natural Experiment," Australian Economic Papers, Wiley Blackwell, vol. 54(2), pages 104-120, June.
    10. Robert Kelly & Kieran McQuinn, 2014. "On the Hook for Impaired Bank Lending: Do Sovereign-Bank Interlinkages Affect the Net Cost of a Fiscal Stimulus?," International Journal of Central Banking, International Journal of Central Banking, vol. 10(3), pages 95-128, September.
    11. Márquez, Elena & Martínez-Cañete, Ana R. & Pérez-Soba, Inés, 2013. "Wealth shocks, credit conditions and asymmetric consumption response: Empirical evidence for the UK," Economic Modelling, Elsevier, vol. 33(C), pages 357-366.
    12. Murray, Cameron & Ryan-Collins, Josh, 2020. "When homes earn more than jobs: the rentierization of the Australian housing market," OSF Preprints 8f67h, Center for Open Science.
    13. John Muellbauer & Pierre St-Amant & David Williams, 2015. "Credit Conditions and Consumption, House Prices and Debt: What Makes Canada Different?," Staff Working Papers 15-40, Bank of Canada.
    14. Kelly, Robert & McQuinn, Kieran, 2013. "On the hook for impaired bank lending: Do sovereign-bank inter-linkages affect the fiscal multiplier?," Research Technical Papers 01/RT/13, Central Bank of Ireland.
    15. David M. Williams, 2010. "Consumption, wealth and credit liberalisation in Australia," Economics Series Working Papers 492, University of Oxford, Department of Economics.

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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