Cascade model for Australian housing

Abstract

We design a ‘cascade model’ that integrates projections for Australian housing with inflation, incomes and asset markets over long horizons. The model allows simulating joint ‘paths’ for inflation, wages, cash rates, mortgage rates, rents, rental yields, house prices and fund returns. The cascade model structure ensures that equilibrium relationships are maintained between the variables when projecting over very long time periods. It achieves this through linking either growth rates or levels for variables in a manner that ensures consistent trends emerge within each simulated path over the very long-term, thus avoiding excessively divergent behaviour between variables with common underlying fundamentals.