Follow the leader: Exploring leading indicators of the Victorian property market By Madeleine Tan and Maryam Nasiri ABSTRACT This paper examines potential leading indicators in the Victorian property market for the purposes of analysing market trends and turning points. The research will rely on several economic and econometric methods. In the first portion of the paper, hedonic property price indices are constructed and the methodology is described. The second stream looks to determine whether there are certain groups that might lead the wider property market, based on different stratification approaches by either value or location. There is evidence that the inner and metropolitan (metro) regions, the cluster of regions in the central business district (CBD) and the south-east of Melbourne, and high-value properties (top 25 percentile) lead the overall (headline) property price cycle in Victoria. The relationship between Melbourne and Sydney’s property market was found to reflect interdependence, rather than a causal relationship with the direction of causality going both ways. Overall, the leading indicators provide some evidence in favour of future property price growth easing in Victoria in the future Overview Understanding movements in house prices is fundamental for economic and financial development. The boom and bust cycles in the housing market have consequences for the rest of the economy, including real activity, employment, wages and inflation. The events following the collapse of the subprime mortgage market in the United States (US) is an example of the importance of the housing market for the broader economy. It has been found that the economic impact of changes in house prices is often larger than the impact of changes in equity prices and the consequences for the real economy are more pronounced (Case, Quigley, and Shiller, 2005; Jorda, Schularick, and Taylor, 2015). leading- lagging
Taken together, these results suggest a pattern where changes in property market conditions are first captured in the inner areas of Melbourne, before spreading to the metro and outer regions. Table 3: Granger causality test for headline, inner, metro and outer region hedonic price growth TEST CATEGORY NULL HYPOTHESIS F-STATISTIC PROB. REJECT THE NULL HYPOTHESIS? Within Greater Melbourne Metro area does not Granger Cause Inner 0.154 0.857 No Inner area does not Granger Cause Metro 11.781*** 0.000 Yes Outer area does not Granger Cause Inner 0.091 0.913 No area does not Granger Cause Outer 11.582*** 0.000 Yes Outer area does not Granger Cause Metro 2.378* 0.096 Yes Metro area does not Granger Cause Outer 29.258*** 0.000 Yes Headline does not Granger Cause Inner 0.477 0.752 No Headline does not Granger Cause Metro 0.940 0.443 No Headline does not Granger Cause Outer 13.840*** 0.000 Yes Inner area does not Granger Cause Headline 5.355*** 0.001 Yes Metro area does not Granger Cause Headline 10.186*** 0.000 Yes Outer area does not Granger Cause Headline 3.471*** 0.010 Yes ***, ** and * indicate that the results are signifiican at 1 per cent, 5 per cent and 10 per cent, respectively.
These uncertainties can impact the: demand for a service (or for the value or benefits derived by providing the service), by influencing and altering the community need and therefore the case for investment; and/or supply or cost of a solution, by influencing the market’s ability and capacity to deliver the required project scope, achieve time, budget and value-for-money constraints, and realise the desired benefits and outcomes. For example, changing demographics can influence the demand for services that target specific community sectors. If the age profile of a region significantly changes, it could impact the community need for investments in maternal health, early childhood and education services as well as for health and aged care facilities. Technological innovations and disruptions can introduce new market participants that radically change consumer behaviour or influence demand trends. Similarly, technological innovations may be able to provide alternative delivery mechanisms that are more efficient and/or effective. Uncertainties can lead to unfavourable conditions, present threats to achieving an investment strategy’s benefits. They can also create favourable conditions, which present opportunities for achieving cost or time savings, greater value-for-money outcomes or enhanced benefits realisation that could not have been foreseen at the time of the funding decision. These unanticipated changes to demand and supply forces can profoundly impact an investment strategy’s feasibility: investment options that are preferred and would be successful under one set of conditions can become unviable (inappropriate, undeliverable or unaffordable) if circumstances change. This can affect an investor’s ability to achieve the desired investment outcomes and benefits (Ofgem, 2012). For example: Increases in desired or required levels of service or service demand can result in investments in assets that do not meet capacity. Decreases in required levels of service or service demand can lead to asset obsolescence, accompanied by perceptions of over-investment or inappropriate investment. Changes to preferred service delivery models and methods or disruptive or unexpected new technologies can result in unsuitable assets, do not meet user needs and expectations.