Housing price dynamics on residential construction: A case study of the Australian property sector

Abstract

Residential construction price is a critical indicator to optimise key-market stakeholders’ decision-making for property development. As an up-stream market, housing market can bring significant effects on the residential construction sector. However, the relationship between housing and construction markets has been overlooked. This study therefore examines the underlying dynamics of house prices on the residential construction sector by addressing the following research question: How do construction prices respond to the changes of house prices? A panel error correction model is developed to estimate the long-run equilibrium and short-run dynamic patterns between the two markets. Significant market relationships are identified, e.g., long-run equilibrium between housing and residential construction prices in Australia's Capital Territory and states South Australia, Tasmania and Victoria. Conversely, short-run dynamic patterns are derived in New South Wales, Queensland, Victoria and South Australia. Empirical evidence indicates a robust ability of the developed model in residential-construction price prediction (<5%). This research provides property-sector key stakeholders with an insight into market interaction and a reliable prediction tool for decision making of real-estate planning/development.