Volatility Decomposition of Australian Housing Prices

Abstract

In this study, we examine the volatility pattern of Australian housing prices over an extended time frame. A component-generalized autoregressive conditional heteroscedasticity (C-GARCH) model was utilized to decompose the conditional volatility of housing prices into a “permanent” component and a “transitory” component. The results demonstrate that the shock impact on the short-run component (transitory) is much larger than the long-run component (permanent), whereas the persistence of transitory shocks is much less than permanent shocks. Moreover, both permanent and transitory volatility components have different determinants. We provide important new insights into the volatility pattern of housing prices that should enable more informed investment and government policy decision-making.