Two countries, sixteen cities, five thousand kilometres: How many housing markets?

We examine whether a single housing market exists across 16 cities covering two countries, Australia and New Zealand. Distances between almost all of these cities are vastly greater than commuting distances. For instance, Perth is over 2,000 kilometres (kms) from its nearest large city neighbour, Adelaide, and is over 5,000kms from the New Zealand cities. If there is a single housing market across these cities, then the economic forces that lead to such convergence must be other than commuting arbitrage forces that have been posited as driving convergence in densely populated countries such as the United Kingdom. We define a single housing market as one in which a single stochastic trend determines the long run path of real house prices in all cities. We adopt a strong and a weak form definition of a single housing market. The strong form occurs when an innovation to the single stochastic trend affects house prices across all cities to an equal degree. The weak form occurs when an innovation to the single stochastic trend affects house prices in all cities, but not to an equal degree. In the strong case, ratios of house prices between all city pairs stay the same in the long run, while in the weak case house price ratios between cities will tend to diverge even though they are affected by the same long run influences. We find that the sixteen housing markets are characterised by the weak form of single housing market. Thus there is a single shared long-run driver of house prices across cities that are over 5,000 kilometres apart spanning two independent countries that are themselves 2,000 kilometres apart. The dynamic structure of adjustment reveals three groups of cities. House price shocks are first reflected in the price dynamics of a leading group of cities all of which are within Australia (including the two largest cities, Melbourne and Sydney), then flow through to a group of follower cities comprising a mix of peripheral Australian and major New Zealand cities, and then to a group of laggard cities all of which are within New Zealand. Our finding of a single housing market implies that macroeconomic policies must either have been convergent across the two countries or they have been incapable of independently controlling long run real house prices, despite the existence of independent monetary and fiscal policies in each country. Our theoretical model illustrates how the weak form of single housing market may arise due to differences across cities in migration responses to house prices and/or land price responses to migration flows.