Analysing the Relationship between New Housing Supply and Residential Construction Costs with the Regional Heterogeneities

Transcription

1 Analysng he Relaonshp beween New Housng Supply and Resdenal Consrucon Coss wh he Regonal Heerogenees Junxao Lu, (Deakn Unversy, Ausrala) Kerry London, (RMIT Unversy, Ausrala) Absrac New housng supply n Ausrala has been experencng a low rae of ncrease n conjuncon wh a dramac ncrease n resdenal consrucon coss snce he 1990s. Ths sudy ams o esmae he relaonshp beween new housng supply and resdenal consrucon coss wh he regonal heerogenees. Based on a panel error correcon model, can be denfed ha here s a causal lnk as well as a sgnfcan correlaon beween new housng supply and consrucon coss n he Ausralan sub-naonal housng consrucon markes. The model developed n hs research assss polcy makers o beer undersand he naure of he supply sde of he housng secor and hen enac approprae polces o mprove he new housng supply n Ausrala. Keywords: New housng supply, Resdenal consrucon coss, Regonal heerogenees Inroducon The capacy of he Ausralan housng secor o supply has reached a crss pon snce he 1990s, durng whch Ausrala s urban populaon ncreased dramacally (ABS, 2010a). Fgure 1 ndcaes ha he annual populaon growh n Ausrala exhbed a sgnfcan upward rend beween 1996 and 2009 whle he number of new housng commencemens was hghly sable. Accordng o he projecon of he Ausralan Naonal Housng Supply Councl (NHSC, 2010) n 2010, approxmaely 3.2 mllon addonal dwellngs wll be requred across Ausrala n he nex 20 years o accommodae a dramac populaon growh. Urban economc heory suggess ha here should be a long-run convergence beween oal housng sock and urban populaon (DPasquale, 1999). However, can be nferred from Fgure 1 ha a dvergence beween housng supply and urban populaon has occurred n Ausrala. The annual repor of he Housng Indusry Assocaon (HIA, 2010) suppored hs perspecve and saed ha a housng shorage of approxmaely 110,000 emerged n 2009 n Ausrala and hs problem wll be exacerbaed n he fuure f he poor performance of he Ausralan new housng supply s no able o be mproved. An neresng suaon along wh he low ncreasng rae of he new housng supply n Ausrala s ha he npu producer prce ndexes (PPI) of housng consrucon ncreased by more han 40% across he Ausralan saes (ABS, 2010b). The npu PPI s a measure of he changes n he prces of goods and servces purchased by domesc producers for nermedae npus of producs (Inernaonal Moneary Fund, 2004). Thus, he npu PPI relaed o housng consrucon s vewed as a measure for he changes n he npu cos level of housng producon. Convenonal economcs clams ha an ncrease n he npu consrucon cos reduces new housng oupu level (Somervlle, 1999). However, few emprcal sudes have nvesgaed wheher or no he rses n resdenal consrucon coss causally and negavely affec he supply of new housng n Ausrala. Ths paper sars by presenng prevous sudes on he relaonshp beween new housng supply and resdenal consrucon coss. Then, he mehodology and he daa wll be

2 Populaon Growh & New Housng Commencemens (Uns:'000) Ausralasan Journal of Consrucon Economcs and Buldng descrbed. Fnally, he resuls yelded by he seleced economerc model wll be ulsed for analyss and dscusson Populaon New Housng Commencemens Fgure 1 Populaon growh and new housng commencemens n Ausrala (Source: ABS, 2010a) Leraure Revew The sudes on new housng supply are less common han ha of housng demand. However, he early research wh regard o he supply of new housng can be daed back o he 1960s and he focus s esmang he prce elascy by he reduced-form mehod. The reduced-form echnque s a smple regresson approach where house prce s a funcon of he facors n relaon o supply and demand. The early reduced-form sudy, commenced by Muh (1960), who examnes he relaonshp beween new housng oupus and house prces n he US, usng naonal daa. The resuls ndcae ha here s no correlaon beween new housng oupus and house prces. Follan (1979) ess he prce elascy of long-run new housng consrucon applyng Muh s (1960) model o naonal daa as well. The resuls are smlar o Muh s (1960) fndngs, suggesng ha new housng sars are oally prce nelasc. Neverheless, s no possble o conclude, dependng upon hese wo sudes (Follan, 1979; Muh, 1960) ha he supply of new housng s prce nelasc as Muh (1960) and Follan (1979) use naonal daa ha has a poenal problem n aggregaon bas (Sover, 1986). To solve hs problem, a funcon wh he cross-seconal daa across 61 US meropolan areas was esmaed by Sover s (1986) sudy, n whch new housng supply s sgnfcanly relaed o house prces. Snce he 1980s, here have been a seres of emprcal sudes aempng o model he new housng supply drecly. The approaches employed n such research emphasses a more srucural mehod, n whch he consrucon or aggregae supply s deemed o be a funcon of prce and cos facors (DPasquale, 1999). The heory underpnnng hese sudes s derved from he nvesmen leraure and urban spaal heory. Whn he framework of he nvesmen leraure, he demand for nvesmen n housng s assumed o be he demand for new consrucon (Mongomery, 1992). Accordngly, an asse marke approach, whch vews housng nvesmen as a funcon of economc facors [e.g. Lu, J and London, K (2011) Analysng he relaonshp beween new housng supply and resdenal consrucon coss wh he regonal heerogenees, Ausralasan Journal of Consrucon Economcs and Buldng, 11 (3)

3 Ausralasan Journal of Consrucon Economcs and Buldng house prces, he prce of oupu alernave (non-resdenal deflaor) and consrucon coss], s developed by Poerba (1984) o es he mpac of he user coss on he seady sae of he housng marke. The resuls ndcae ha house prces s an essenal deermnan of new housng consrucon and he ncreases n prces of non-resdenal consrucon lead o decreases n resdenal consrucon. However, Poerba (1984) found ha here s no sgnfcan relaonshp beween consrucon coss and new housng supply. The model proposed by Poerba (1984) pursues he long-run equlbrum relaonshps among new housng supply, house prces and cos facors. However, he nerrelaonshp beween he varables whn a shor-run conex s gnored. Topel and Rosen (1988) denfed hs pon and developed a model where new housng supply s a funcon of house prces and a vecor of cos facors. The resuls show ha he long-run supply elascy of prce s 3.0 bu he shor-run elascy s only 1.0. In shor, he supply of new housng n he US s prce elasc. Topel and Rosen s (1988) model yelds a resul smlar o Poerba s (1984) fndngs, whch sugges ha he mpac of consrucon cos on new housng supply s no sgnfcan. Alhough he nvesmen-based models (Poerba, 1984; Topel and Rosen, 1988) have conrbued o he leraure, advocaes of he urban-spaal heory sll crcse hese sudes because all of hem gnore an mporan ssue he npu of land. In realy, Poerba (1984) acknowledged he mporance of land npu n housng supply research bu omed n hs model due o a lack of daa. The urban spaal heory s a heorecal sysem whch assumes ha oal housng sock equals urban populaon and land ssues manan an mporan role n new housng producon (DPasquale, 1999). One valuable pece of housng supply work on he bass of urban spaal heory s he research by DPasquale and Wheaon (1994). Ths sudy produces an equaon where new housng supply s a funcon of house prces, land prces, consrucon coss and lagged housng sock. By esmang hs funcon, he prce elascy of housng sock and he prce elascy of new housng consrucon range from 1.2 o 1.4 and 1.0 o 1.2 respecvely. However, DPasquale and Wheaon (1994) can no denfy a sgnfcan lnkage beween consrucon coss and new housng consrucon. As descrbed prevously, he emprcal research on new housng supply shared a problem n esmang he nerrelaonshp beween new housng supply and consrucon coss. Therefore, Somervlle (1999) develops an hedonc consrucon cos seres wh an enrely new se of mcro-daa on housng consrucon o examne he lnk beween new housng oupus and resdenal consrucon coss across he meropolan areas of he US. The emprcal resuls ndcae ha he housng sars n he US are cos elasc and consrucon cos s endogenous n he new housng supply funcon. The possble reason for he poor performance of he housng supply sudes of housng sars and consrucon coss s a bas n he commercal cos ndexes used by he prevous research (Somervlle, 1999). Ths leraure revew demonsraes ha some emprcal sudes (DPasquale & Wheaon, 1994; Poerba, 1984; Topel & Rosen, 1988) have aemped o uncover he lnkage beween new housng supply and resdenal consrucon coss snce he 1980s. However, he researchers fal o denfy a sgnfcan relaonshp beween hese wo varables. In 1999, Somervlle (1999) successfully dscovered hs correlaon and clamed ha he possble reason for he poor performance of he prevous sudes s he bas n he daa. In addon, can be denfed from he exsng housng supply leraure ha he regonal heerogeney has no been emprcally consdered n he pas research, leadng o an crcal assumpon ha omng he regonal heerogenees could be anoher reason for he falure of he prevous models (DPasquale & Wheaon, 1994; Poerba, 1984; and Topel & Rosen, 1988). Ths paper wll conrbue o he leraure by explorng he relaonshp beween new housng supply and resdenal consrucon coss wh he regonal heerogenees. Lu, J and London, K (2011) Analysng he relaonshp beween new housng supply and resdenal consrucon coss wh he regonal heerogenees, Ausralasan Journal of Consrucon Economcs and Buldng, 11 (3)

4 Ausralasan Journal of Consrucon Economcs and Buldng Sgnfcance of he Regonal Heerogeney The leraure revew suggess ha consrucon cos s a key deermnan of new housng supply. However, he sub-naonal or regonal housng markes are segmened and can be nfluenced by a seres of varables oher han coss changes, such as polces, culure, race, educaon and even gender composon of local populaons (Tu, 2003). These facors resul n regonal varaons, whch are also known as he regonal heerogenees. The majory of he facors ha rgger he regonal heerogenees (e.g. culure, race and educaon) are dffcul o observe n emprcal research, however hey can say consan over me o effecvely affec he demand and he supply sdes of he housng secor (Reed, 2001). Thus, modelng he housng markes on a regonal level whou regonal heerogenees s no realsc. The sudy conduced by Tu (2000) dscovered ha he Ausralan regonal housng markes are segmened and hey are manly deermned by local facors vared by regons. In smple erms, he heerogenees across he regons manan an acve role n he sub-naonal housng markes n Ausrala. As a resul, he regonal heerogenees are sgnfcan o he sudy regardng he Ausralan sub-naonal housng secor. Mehodology Theorecally, he eny fxed-effec models of he panel economerc echnques no only capure he me-seres effecs, bu also allow for he effecs of hose omed varables ha are specfc o ndvdual cross-seconal uns bu say consan over me (Hsao, 2003, p. 30). In oher words, he panel economerc models can quanfy he effecs specfc o he heerogenees whn a cross-seconal un (e.g. regonal markes) across perods (Greene, 2000). To nvesgae he causal lnk and correlaon beween new housng supply and resdenal consrucon coss wh regonal heerogenees, a panel error correcon model (ECM) wll be employed n hs sudy. The ECM s a regresson model wh a conegraon and error correcon erm. I s useful for denfyng he Granger causaly and any correlaon beween varables (Dnda & Coondoo, 2006; Luo e al., 2007). Two ess mus be conduced before consrucng he panel ECM, one s he panel un roo es and he oher s he panel conegraon es. Panel Un Roo Tess: IPS es The un roos ess are an mporan sep for economerc modelng and hey are ulsed o examne he saonary of he daa. I s argued ha he regresson wll be spurous f he daa mpored are non-saonary (Granger & Newbold, 1974). The mehod used n hs paper o es he un roos s he IPS es. The IPS es s proposed by Im e al. (Im, Pesaran and Shn) (1997; 2003) n The man equaon of he IPS es s expressed n Eq. (1). y, y,( 1,2,, N; 1,2,, T) (1),, 1 The null and alernave hypoheses of he IPS es are defned as: H 0 : 0 ( 1,2,, N) H 1 : 1 1 N 0 ( 1,2,, N), 0 ( N 1, N 2,, ) (2) Lu, J and London, K (2011) Analysng he relaonshp beween new housng supply and resdenal consrucon coss wh he regonal heerogenees, Ausralasan Journal of Consrucon Economcs and Buldng, 11 (3)

5 Ausralasan Journal of Consrucon Economcs and Buldng The, are serally auo-correlaed wh dfferen seral correlaon properes across uns. A group-mean Lagrange mulpler (LM) sasc s used by Im e al. (1997) o es he null hypohess n Eq. (2). Ths LM-sasc s compued by he regresson shown as follows: p y y, y,, 1,2,... T.,, 1 L, L (3) L1 Im e al. (1997) defnes 1 LM N, T N LM 1 N T ( p, ) (4) Then he values of E[ LM, ( p,0) 0] and Var[ LM, ( p,0) 0] are obaned by Im e al. (1997). Under hese assumpons, Im e al. (1997) concludes ha: LM N(0,1) (5) Im e al. (1997) also employs a group-mean -bar sasc o es he un roos of he panel daa. Applyng a Mone Carlo Sudy, Im e al. (1997) demonsraes he fne sample propery of he IPS es and denfes ha he IPS es under he small sample has a beer performance han oher panel un roo ess. Panel Conegraon Tess The panel conegraon es developed by Pedron (1999) wll be seleced n hs sudy. Pedron s (1999) es s an EG-based (Engle-Granger) conegraon es, n whch he followng models of he conegraed regressons are consdered. ' y,, ( 1,..., N, 1,..., T), x, (6) where,,..., ) and x x, x,..., x ). The sysem expressed as Eq. (6) ( 1 2 M, ( 1, 2, M, allows for heerogeney n he panel. As a resul, heerogeneous coeffcens, fxed effecs and ndvdual specfc deermnsc rends are all permed. Moreover, y, and x, are negraed process of order one for all. ' ' y x Pedron (1999) bulds up a H 0, defnng z, ( y,, x, ),, (,,, ), and ', where he process, sasfes z, z, 1, 1 T Tr 1 ( ) for all as T. (7), B Here B ( ) s a vecor Brownan moon wh asympoc covarance n whch 22 s non-sngular. The B ) s ulsed o be defned on he same probably space for all and ( ' E(, ) 0 for all j and hen for all s,., j, s Accordngly, seven panel conegraon sascs are derved by Pedron (1999), of whch four ess belong o he frs caegores ha are defned as whn-dmenson-based sascs. In he frs caegory, he four ess depend on a varance raon sasc, a non-paramerc Lu, J and London, K (2011) Analysng he relaonshp beween new housng supply and resdenal consrucon coss wh he regonal heerogenees, Ausralasan Journal of Consrucon Economcs and Buldng, 11 (3)

6 Ausralasan Journal of Consrucon Economcs and Buldng Phlps and Perron ype sasc, a non-paramerc Phlps and Perron ype sasc and a paramerc ADF-based es respecvely. Regardng he second caegory, whch s defned as he beween-dmenson-based sascs, wo of he hree ess are non-paramerc correcons whle he hrd s a es of he ADF. The ess n he second caegory are based on a group mean approach (Pedron, 1999). Panel Error Correcon Model Once he parwse conegraon beween wo varables has been denfed, he nex sep n he Engle-Granger mehodology s o model he shor-run varaons of he varables, whch can be done by esmang he ECM (Dnda & Coondoo, 2006). The ECM was frs nroduced by Sargan (1964) n he 1960s and sysemacally developed by Davdson e al. (1978) n he 1970s. However, he ECM was wdely promoed by Engle and Granger (1987) n he 1980s. Accordng he ECM mehodology, he panel ECM s wren: Y, X, ecm 1,2,3..., N; 1,2,3..., T) (8) ecm Y, 1, ( (9) 1X, 1, 1 0, 1 where Y, and X, represen he daa panel Y, and denoe he regresson parameers; he symbol X, a he frs dfference; and sands for he rapdy of adjusng o ecm represens he equlbrum and hey are expeced o have negave values; and he, 1 error correcon erm, n whch he 0 s he consan em and he 1 sands for he longerm elascy. The error correcon erm can be derved from he resdual generaed by a smple regresson of wo varables. The panel ECM n hs sudy wll be esmaed by a seemngly unrelaed regresson (SUR), whch s able o address problems assocaed wh he presence of cross-seconal dependency among he seres n he panel (Holmes, 2007, p. 3). Daa Collecon For he purpose of esmang a panel ECM, he new housng commencemens (NHC) and he npu PPI () of housng consrucon of he Ausralan sx saes (excludng Ausralan Capal Terrory and Norhern Terrory) wll be seleced. The daa on he new housng commencemens are publshed n Buldng Acvy Ausrala n he ABS, measurng he number of he new housng commenced for consrucon (ABS, 2010b). The npu PPI of housng consrucon s one ype of he producer prce ndexes used o measure he prces of goods or servces purchased by domesc producers for nermedae npus of housng consrucon (ABS, 2010c). The reason for excludng he wo errores n he model s a lack of housng consrucon npu PPI of he Nohern Terrory and he Ausralan Capal Terrory. The repor of he ABS (2010b) on he Ausralan Socal Trends clamed ha he daa for naonal oal on he npu PPI of house consrucon are a weghed average of sx saes. As a resul, modellng he new housng supply and consrucon coss for Ausrala whou he daa on wo errores s accepable. All he daa mpored no he panel ECM n nex analycal secon are ransformed o naural logarhms. Analyss and Dscusson Lkewse he me-seres ECM, he prerequse of consrucng he panel ECM s ha he daa used mus be saonary. Table 1 repors he resuls of he IPS un roo ess and ndcaes ha he daa are negraed of he order one,.e. I (1). Lu, J and London, K (2011) Analysng he relaonshp beween new housng supply and resdenal consrucon coss wh he regonal heerogenees, Ausralasan Journal of Consrucon Economcs and Buldng, 11 (3)

7 Ausralasan Journal of Consrucon Economcs and Buldng Level Frs Dfference Resuls Model Specfcaon (Lags) Sa. p-value Model Specfcaon (Lags) Sa. p-value ln(nhc) Indvdual Inercep & Trend Indvdual Inercep (1) I (1)*** ln() Indvdual Inercep & Trend Indvdual Inercep (1) I (1)*** Table 1 Summary of he IPS un roo es resuls Noes: ** and *** denoe he 95% and 99% sgnfcance level The second sep for formulang he ECM s o denfy he conegraon relaonshp. As menoned n Mehodology, he Pedron es wll be conduced. Table 2 summarses he Pedron es resuls assocaed wh he seleced varables. The resuls sugges ha here s conegraon beween he new housng commencemens and he npu PPI. Model Specfcaon (Lags) Panel ADF-Sa. P-values Weghed Panel ADF-Sa. P-values (weghed) Resuls ln(nhc) (D.V.) ln() (I.V.) Indvdual Inercep (1) Y Indvdual Inercep & Trend (1) Y Table 2 Summary of he Pedron conegraon es resuls Noes: D. V. denoes he dependen varable and I. V. denoes he ndependen varable As conegraon s found, he panel ECM can be consruced o uncover he naure of he arge relaonshp. The model dsplayed as Eq. (10) s he panel ECM composed of he new housng commencemens and he npu PPI. Table 3 shows he -sascs and he p-values of he ndependen varables of he panel ECM, all of whch ndcae ha he coeffcens of he ndependen varables () are sgnfcan. D ( NHC NSW ) * D( NSW, ) * ecmnsw, 1, D ( NHCVIC ) * D( VIC, ) * ecmvic, 1, D ( NHCQLD ) * D( QLD, ) * ecmqld, 1, D ( NHC SA ) * D( SA, ) * ecmsa, 1, D ( NHCWA) * D( WA, ) * ecmwa, 1, D NHC ) * D( ) * ecm (10) ( TAS, TAS, TAS, 1 Based on he conegraon ess and he panel ECM (Eq. 10), can be concluded ha here s a causal lnk beween he new housng commencemens and he npu PPI of housng consrucon across he Ausralan sx saes. As clamed by Johansen (1988), he Granger causaly exss n a leas one drecon beween wo varables f hey are co-negraed. In he Pedron conegraon ess and he panel ECM, he NHC s he dependen varable and he s he ndependen varable. Hence, he npu PPI Granger-causes he new housng consrucon on a regonal level n Ausrala. Furhermore, he coeffcens of he npu PPI n he panel ECM are all sgnfcan and negave, whch ndcae ha he ncreasng rends of he new housng commencemens n sx saes were sgnfcanly depressed by he dramac Lu, J and London, K (2011) Analysng he relaonshp beween new housng supply and resdenal consrucon coss wh he regonal heerogenees, Ausralasan Journal of Consrucon Economcs and Buldng, 11 (3)

8 Ausralasan Journal of Consrucon Economcs and Buldng ncreases n he housng consrucon npu PPI. Ths fndng comples wh he convenonal economc heory dscussed n Inroducon. -sascs p-values NSW, VIC, QLD, SA, WA, TAS, Table 3 -sascs and p-values of he coeffcens of he ndependen varables Accordng o he coeffcens n Eq. (10), he new housng commencemens are sensve o he changes n he npu PPI of he Ausralan sx saes. Specfcally, he supples of new housng n Queensland and Tasmana are more sensve o he consrucon cos flucuaons han ha of oher four saes. In New Souh Wales, Vcora, Souh Ausrala and Wesern Ausrala, he supply elasces of he consrucon coss are smlar, rangng from 1.22 o Moreover, he frs coeffcens of he sx equaons n Eq. (10) ndcae ha he regonal heerogenees across he sub-naonal housng markes n Ausrala sgnfcanly affec he relaonshp beween he Ausralan new housng supply and resdenal consrucon coss. These resuls suppor he assumpons on he mporance of he regonal heerogeney addressed prevously. Conclusons Ths sudy has emprcally esmaed he relaonshp beween he supply of new housng and consrucon coss n Ausrala wh regonal heerogenees. Dependng upon he panel ECM and he ess for he panel un roos and he panel conegraon, a causal lnk affeced by he regonal heerogenees has been denfed from he npu PPI o he new housng commencemens n Ausrala. The coeffcens of he varables n relaon o housng consrucon coss n he panel ECM are sgnfcan and negave, ndcang ha he ncreasng rends of he Ausralan new housng supply had been sgnfcanly depressed by he resdenal consrucon coss. I can be furher dscovered from he emprcal evdence ha he new housng oupus n Queensland and Tasmana are more sensve o consrucon cos changes han New Souh Wales, Vcora, Souh Ausrala and Wesern Ausrala. The essenal role of regonal heerogenees and he sgnfcan correlaon valdae he assumpon ha omng regonal heerogenees could be he reason for he falure of he prevous research n esablshng a lnkage beween new housng supply and consrucon coss. The model developed n hs sudy s sued for nvesgang he resdenal consrucon secor whn a comprehensve conex, and provdes polcy makers wh valuable nformaon o beer esmae marke developmen. The overall fndngs n hs paper mply ha consrucon coss and local ssues (e.g. polcal and demographc facors) are undoubedly key deermnans of he poor performance of he Ausralan new housng supply. Accordngly, how o conrol he cos nflaon n he Lu, J and London, K (2011) Analysng he relaonshp beween new housng supply and resdenal consrucon coss wh he regonal heerogenees, Ausralasan Journal of Consrucon Economcs and Buldng, 11 (3)

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