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A ‘two-market’ view of housing

While most analyses treat housing as a single market, the study separates it into two segments, detached houses and units, and tracks how price shocks move between them.

The researchers developed a “two-market spillover model” to examine how price changes interact across geography and dwelling type. The results show the two sectors behave very differently.

“Houses and units are not interchangeable, and this challenges the idea that boosting apartment supply alone will improve affordability,” says Prof. Lee.

“The assumption that units can substitute for houses at scale doesn’t hold in the data. Instead, the widening gap between house and unit prices reflects deeper structural forces, particularly how price pressures originate in the house market and spread across the system.”

Houses dominate the market

The study finds houses are the primary driver of price movements across Australia’s housing system.

Price increases in houses generate significantly stronger ripple effects, or spillovers, than those in the unit market. These spillovers push up unit prices and spread across cities.

“The reverse relationship is far weaker,” says Prof. Lee. “Movements in unit prices have little influence on house prices.”

In effect, the unit market follows, while the house market leads.

“This asymmetry helps explain why house prices have grown much faster than unit prices,” explains Prof. Lee.

The gap widened sharply during the COVID-19 pandemic.

Investment is amplifying price pressures

The study also found most housing spillovers are national rather than local.

Nearly 80% of price spillovers occur between cities rather than within them, a pattern the researchers say cannot be explained by normal housing demand.

“Because Australia’s capital cities are widely dispersed, cross-city price movements are unlikely to reflect typical housing needs. Instead, they indicate investors shifting capital between markets in search of higher returns,” says Prof. Lee.

This pattern is particularly evident in the detached housing sector.

“Inter-city spillovers are consistent with investment-driven behaviour,” he says, adding to evidence that housing is increasingly functioning as a financial asset.

This creates a cycle where price growth attracts investment, transmitting pressures nationally and worsening affordability.

The research highlights that not all cities play equal roles. Sydney and Melbourne remain influential, but Perth has emerged as a major source of price spillovers since the pandemic.

Adelaide, by contrast, is largely a “receiver”, with price movements shaped by larger markets. This shows the housing market operates as a single, interconnected system.

“What happens in Sydney or Melbourne doesn’t stay there,” says Prof. Lee. “It flows through to other cities.”

A more complex housing reality

The findings challenge the view that increasing the supply of units will significantly ease housing pressures. While units are typically more affordable, their limited influence means they do not drive broader market trends.

“Focusing on unit supply alone is unlikely to address the systemic drivers of price growth,” says Prof. Lee.

“Because houses influence both their own segment and the unit market, affordability pressures can persist even with increased apartment supply.

“In other words, you can build more units, but if house prices keep rising, affordability will continue to deteriorate.”

The research suggests current policy settings, heavily focused on increasing supply, may be missing the core driver of the problem. Stronger demand-side measures targeting investment in houses are needed, according to Prof. Lee.

“Potential approaches include tightening investor lending, adjusting tax settings, and improving coordination across states,” he says.

The dominance of inter-city spillovers also suggests that isolated, state-level responses may be insufficient.

“Localised policies may have limited impact in a highly interconnected system,” says Prof. Lee. “Without tackling investor-driven demand, supply-side solutions alone are unlikely to restore affordability.”

The findings reframe Australia’s housing crisis as a structural imbalance, not just a supply shortfall. It is driven by investment activity, linkages between cities, and the dominant role of houses in transmitting price shocks.

For policymakers, the message is clear: fixing the housing crisis will require more than building more units alone.