House price forecasting from investment perspectives

Abstract

Housing market dynamics have primarily shifted from consumption-to investment-driven in many countries, including Australia. Building on investment theory, we investigated market dynamics by placing investment demand at the center using the error correction model (ECM). We found that house prices, rents, and interest rates are cointegrated in the long run under the present value investment framework. Other economic factors such as population growth, unemployment, migration, construction activities, and bank lending were also important determinants of the housing market dynamics. Our forecasting results show that the Sydney housing market will continue to grow with no significant price decline in the foreseeable future.