Asymmetric responses of house prices to changes in the mortgage interest rate: evidence from the Australian capital cities

Authors

Abbas Valadkhani, Swinburne University of TechnologyFollow
Jeremy Nguyen, Swinburne University of Technology
Martin J. O'Brien, University of WollongongFollow

RIS ID

136142

Publication Details

Valadkhani, A., Nguyen, J. & O'Brien, M. (2019). Asymmetric responses of house prices to changes in the mortgage interest rate: evidence from the Australian capital cities. Applied Economics, 51 (53), 5781-5792.

Abstract

We examine the dynamic and asymmetric responses of house prices to changes in mortgage interest rates in Australia from January 1995 to November 2017. We propose a threshold intervention model to distinguish between the effects of positive versus negative changes in the standard variable interest rate. The results indicate that rising interest rates decrease house prices more than falling interest rates increase them. For example, a 1% decrease in interest rates increases Sydney's house prices by 0.7%, whereas a 1% increase leads to a 1.5% fall. The findings also support the view that when interest rates are on the rise, house prices in larger capital cities such as Sydney and Melbourne fall faster than in their smaller counterparts. Our findings imply that a rise in interest rates may thus lead to sharp, fast and significant falls in house prices, a phenomenon which will not simply be a symmetric unwinding of earlier price increases.