Interest rates are a key driver of house prices, an RBA paper says
Traffic Exchange

“We find that low interest rates (partly reflecting lower world long-term rates) explain much of the rapid growth in housing prices and construction over the past few years.”

However these unequivocal statements are, to a degree, at odds with what toldThe Australian Financial Review Business Summit last week.

“The origins of the current correction in prices do not lie in interest rates and unemployment. Rather, they largely lie in the inflexibility of the supply side of the housing market in response to large shifts in population growth,” Mr Lowe said.

“The decline we’re seeing in house prices has very little to do with APRA’s measures. They were both targeted and temporary, and that was appropriate. The decline in prices we’re seeing now is the supply response that took place almost a decade too late.”

While Dr Lowe said low interest rates had “added” to the attraction of investing in an appreciating asset, it was actually the “rigidities on the supply side”, coupled with investors’ desire to benefit from a rising market in a low interest rate environment, amplified the price increases.”

“An obvious question to ask is what are the underlying, or structural, drivers of the large run-up in housing prices and the subsequent decline? There isn’t a single answer to this question. Rather, it is a combination of factors.”

Clickbank Marketing Tools

The banks latest research into housing ran a model looking at the primary influences for house prices, which have fallen 14 per cent peak to trough in this cycle.

Their conclusion is that: “The model suggests that much of the strength in housing prices and construction over the past few years can be explained by the fall in interest rates.”

READ  Fiat Chrysler recalls 882000 pickup trucks for steering, pedal issues - One America News Network

The qualification is that while interest rates may be the driving factor it is only change in rates that drive prices and not the level at which rates are at such as the historically low 1.5 per cent official rate that has not been changed for 28 decisions in a row.

“It is changes in interest rates and in existing housing prices that drive construction, not their level,” the study says.

The analysts note that the ratio of approvals to income has been below average over the past decade but that level of real interest rates had been unusually low and the relative price of established housing has been unusually high.

Read More

Please Login to Comment.