Separating owner-occupier and investor demands for housing in the Australian states

DOIhttps://doi.org/10.1108/JPIF-07-2018-0045
Pages215-232
Published date27 February 2019
Date27 February 2019
AuthorLe Ma,Richard Reed,Jian Liang
Subject MatterReal estate & property,Property valuation & finance,Property management & built environment
Separating owner-occupier and
investor demands for housing
in the Australian states
Le Ma
Deakin University Geelong Campus at Waurn Ponds, Geelong, Australia
Richard Reed
Deakin University, Melbourne, Australia, and
Jian Liang
Department of Finance, Deakin University, Melbourne, Australia
Abstract
Purpose There has been declining home ownership and increased acceptance of long-term renting in
many western countries including Australia; this has created a problem when examining housing markets as
there are dual demand and include both owner-occupiers and investors. The purpose of this paper is to
examine the long-run relationship between house prices, housing supply and demand, and to estimate the
effects of the two types of demand (i.e. owner-occupier and investor) on house prices.
Design/methodology/approach The econometric techniques for cointegration with vector error
correction models are used to specify the proposed models, where the housing markets in the Australian
states and territories illustrate the models.
Findings The results highlight the regional long-run equilibrium and associated patterns in house prices,
the level of new housing supply, owner-occupier demand for housing and investor demand for housing.
Different types of markets were identified.
Practical implications The findings suggest that policies that depress the investment demand can
effectivelyprevent the housing bubblefrom further building up inthe Australian states. The empiricalfindings
shed light inthe strategy of maintaining levelsof housing affordability inregions where owner-occupiershave
been priced out of the housingmarket.
Originality/value There has been declining home ownership and increased acceptance of long-term
renting in many western countries including Australia; this has created a problem when examining housing
markets as there are dual demand and include both owner-occupiers and investors. This research has given to
the relationship between supply and dual demand, which includes owner-occupation and investment,
for housing and the influence on house prices.
Keywords House prices, Long-run equilibrium, Investor, New house supply, Owner occupier,
Short-run dynamics
Paper type Case study
1. Introduction
It is widely accepted the historical purpose of housing is to collectively provide
inhabitants, grouped as households, with accommodation and shelter as a home either as
an owner-occupie r or a renter. In addition each household pays a specified price for access
to housing to obtain a certain level of living quality in a particular location. Therefore,
houses are traded as commodities (Benefield, 2009). In this commodity market, housing
price is determined by the supply and demand equilibrium of housing attributes
(Reed, 2013). At the same time, housing is one of the most popular assets for investment
where the objective for housing investment is to hedge financial risk and to generate
economic returns (Kauko, 2014). From this financial perspective, the house price levels are
dependent on the status of the cost vs benefit equilibrium. These in turn are approximated
by a series of economic fundamentals, including the level of rent, inflation rate, taxes and
interest rate. Accordingly, households consume housing and obtain tenure either as an
Journal of Property Investment &
Finance
Vol. 37 No. 2, 2019
pp. 215-232
© Emerald PublishingLimited
1463-578X
DOI 10.1108/JPIF-07-2018-0045
Received 1 July 2018
Revised 5 November 2018
Accepted 10 December 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
215
Separating
owner-occupier
and investor
demands
owner-occupier, or alternatively as a tenant paying rent to an investor who owns the
property (Park and Von Rabenau, 2011).
From an owner-occupier perspective there is an associati on between different
demographic characteristics and house price levels. Previous evidence shows that
encouraging first-time buyers via grants into the housing market produced a stabilising
effect on house prices (Lee and Reed, 2014). With reference to absolute population size,
population growth is related to a higher level of house prices or alternatively a population
decline is associated with lower house prices (Pawson and Herath, 2015; Levin et al., 2009).
From an investor perspective, the commodity of housing has been directly compared to
investments in alternative forms including the equities market (Chan and Woo, 2013). Other
financial costs, such as borrowing expenses via a mortgage, are also linked to demand for
investment housing (Hanson, 2013).
Under the market efficiency hypothesis, the level of house prices should reflect the
equilibrium between housing supply and housing demand for both owner-occupiers and
investors. Thus, the equilibrium house price level will be held constant when supply equals
but does not exceed dual demand from owner-occupiers and investors. The long-run
equilibriums of housing price across regions have been investigated by the international
literature (Glaeser et al., 2006; Goodman, 2005; Meen, 2000). However, Gabrielli et al. studied
the regional housing prices across Italy but denied the existence of long-run equilibrium. In
many western countries including Australia, there has been declining home ownership and
an increased acceptance of long-term renting (Voicu and Seiler, 2013). Such acceptance in
turn has created a problem when examining housing markets as there are now dual demand
and include both owner-occupiers and investors. An imbalance between supply and dual
demand will drive house prices away from the equilibrium level where the gap between the
actual and equilibrium levels will lead to a level of volatility in house prices.
Previous research widely adopted econometric approaches to simulate the equilibrium
and dynamic patterns between housing supply and house price. Taltavull and Gabrielli
(2015) implemented the econometric models into a cross-sectional data to explore the
house price reactions to the housing supply in Spain and Italy. The findings confirmed the
long-run relationships between the supply and prices with obvious regional clusters.
In addition, the effects of demand cycle on the supply and price movements were
demonstrated. However, to-date there have been very few studies separating the different
types of demand on house prices, from either an owner-occupiers or an investors
perspective. Accordingly, the first objective of this research is to examine the long-run
relationship between house prices, housing supply, owner-occupier demand and investor
demand. The second objective is to estimate the effects of the two types of demand
(i.e. owner-occupier and investor) on house prices. The third objective is to examine the
two types of demand on the housing supply. The findings will assist stakeholders,
policymakers and practitioners to address issues and make informed decisions about
house prices, housing supply and housing demand.
2. Literature review on supply and demand in the housing market
Previous studies into housing for owner-occupiers argued the level of house prices was an
indicator reflecting the interaction between the supply and demand of utility-bearing
housing attributes (Theriault et al., 2003). Building upon the hedonic model (Rosen, 1974),
Case and Shiller (1987) proposed a repeat-sale model to illustrate house-price dynamics
over time as the basis for constructing house price indexes. In addition to the internal
attributes of housing there has been an increased focus on the association between
external housing attributes and house prices. For example, the importance of location as
well as the unique attributes of housing with reference to house prices have been
confirmed by previous studies (see Gelfand et al., 2004; Gobillon and Wolff, 2011;
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