Bubbles and Crashes in the Australian Residential Property Market

This paper analyzes the Australian property market, the relationships between cities, houses and units, and the stock market with a focus on bubbles and crashes. Using monthly housing and unit prices for all eight capital cities we find that bubbles are more frequent, last longer and are more synchronized than crashes. Also, crashes do not immediately follow bubbles and are more prevalent across apartment units. Despite the existence of corrections in property prices the average returns and the risk-return relationships are more favorable in the property market than the stock market. We also identify a strong and positive change in correlations between the stock market and the property market around the global financial crisis consistent with financial contagion. A Vector Autoregression (VAR) further shows that policy interest rates and stock market returns significantly influence property prices which in turn influence the cash rate and the stock market. The relative stability of Australian property prices over the last 20 years suggests that policy makers played a role by providing an accommodating environment.