Australia's Growth in Households and House Prices

Abstract

Real house prices rise in Australia amid growing concern of an impending correction. This article explains why the household formation rate has risen with strong population growth due to higher net immigration and average household size levelling off due to population ageing. An intertemporal model is developed to analyse the effect of an increase in the household formation rate on the housing market. I find that real house prices rise over time if the rate of household formation outstrips the rate of housing supply. Under forward looking expectations, a rising household formation rate could explain rising real house prices relative to the present discounted value of future wages. The results explain why real house prices may exhibit an upward trend despite population ageing and how government planning could have an impact.

Local House Price Effects of Internal Migration in Queensland: Australia's Interstate Migration Capital

“…Among those, Guest and Swift (2010) foresee that from 2008 to 2050, the ageing population may result in a decrease in real house prices by 3 per cent to 27 per cent compared to what it would have been, according to a life‐cycle optimisation and econometric model, respectively. As opposed to this study, Day (2018) predicts that population ageing contributes to excess demand for housing and higher house prices by employing an overlapping generations framework. Furthermore, Cho, Li and Uren (2021) provide a discussion on rising house prices and falling home ownership rates and evaluate housing affordability issues across capital cities in Australia since the early 2000s.…”

Financing first home ownership: modelling policy impacts at market and individual levels

“…Finally, we note that there has been relatively little research using these macro-simulation models to study the Australian housing market. Day (2018) uses a two-period model of Australia to show that a growing population may explain rising Australian house prices if housing supply is limited. However, this model abstracts from lifecycle dynamics, household inequality and housing tenure choice.…”