The effect of quality determinants on house prices of eight capital cities in Australia

Abstract

Purpose This paper aims to examine the effects of “quality” as well as fundamentals on house prices in eight capital cities in Australia from 1985-2011. Two types of quality are considered: housing quality, proxied by “value of alterations and additions”, “value of new residential buildings”, “floor area” and “site area”; and living environment quality, proxied by “overall crime rate”. Design/methodology/approach The application of dynamic panel model, in which the lagged values of house prices are considered, is to reveal the dynamic persistence of house prices over time and to investigate the heterogeneity of house prices across cities in Australia. Findings Fundamental variables including “unemployment rate”, introduction of “GST” (Goods and Service Tax), “real mortgage rate” and “price-to-rent ratio” demonstrated their consistent and expected effects on property prices in Australia. More importantly, “value of new residential buildings” – indicating housing quality – and “overall crime rate” – representing environmental living quality – also demonstrated statistically significant effects on house prices. Originality/value As one of the few studies that attempt to take housing/living-environment quality into account in analysing house prices, it gives households, researchers and policy-makers a better understanding of the role of “quality” in the variation of house prices.