RDP 2019-01: A Model of the Australian Housing Market 3. Overview of the Model

Trent Saunders and Peter Tulip

March 2019

Our model takes income, interest rates, population, and depreciation as given. More precisely, these variables are modelled simply, with no feedback from the housing sector. We examine how these and other factors combine to influence construction activity, the housing stock, rents and housing prices. Figure 1 shows a stylised summary of our model, with a more detailed version presented in Online Appendix A. This framework is more detailed than, but not conceptually different to, the housing blocks of the Australian macroeconometric models cited above. Oxford Economics (2016, Figure 1) describe their model of the UK housing market with a similar diagram.

Figure 1: Key Model Relationships
Figure 1: Key Model Relationships

Note: Numbers in parentheses denote the section where the relevant equation is discussed

The model has six important equations, denoted by blue boxes, which we discuss in Section 4. It also contains a large number of identities and simple forecasting equations (typically autoregressions) used for projecting forward variables we think of as exogenous. The equations are presented in Online Appendix E, available in the supplementary information published with this paper on the RBA website.