Abstract
This paper studies the theoretical relationship between house prices and income by using the user cost equilibrium condition. Empirically, the long-run and short-run dynamics of this relationship are investigated by using data for 144 Local government areas (LGA) over 25 years from 1991 to 2015 in the state of New South Wales, Australia. The income elasticity of house prices for the state is estimated to be 1.07 by multi-factor panel data models and the cointegration analysis. The income elasticities across locations demonstrate a spatial pattern, higher in Sydney and the Sydney surrounds and diminishing as going to inland regional and rural areas. The Granger Causality of the co-integrated relationship has been studied sequentially and proves the unidirectional causality from income to house prices. Finally, the state-wide common factors are found to show widespread significance in contrast to the Sydney-wide common factors which only impact significantly the areas that surround Sydney within some particular spatial range.
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