The boom in Australian home prices and building over the past decade or so was primarily driven by lower real interest rates, while strong migration tended to lift rents, according to a study paper from the country’s central bank. The research model from Reserve Bank of Australia (RBA) economists Trent Saunders and Peter Tulip also suggested that a further reduction in real rates could revive home prices after recent weakness. At their peak, prices in Sydney more than doubled between 2008 and 2017, but have since fallen back by around 10 per cent. This pullback may have dampened consumer demand, notably for vehicles and home furnishing, and is increasingly weighing on approvals to build new homes. The RBA cited uncertainty over this impact when dropping its tightening bias last month, saying the next move in rates could equally be a cut or a hike. The bank’s board also studied a separate paper on recent housing market developments at its February policy meeting. “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 – some of this fall reflects lower world real interest rates and some is cyclical,” wrote the paper’s authors. The RBA cut interest rates sharply in 2008 during the global financial crisis, and began a second round of easing from 2011 to 2016 which took rates to a record low of 1.5 per cent. Analysts have questioned whether further cuts would have much impact on the economy or home prices, but the model put forward in the paper suggests they would. According to the model: “A percentage point drop in the expected real mortgage rate would boost housing prices by 28 per cent in the long run.” The increase in housing supply eventually boosts the vacancy rate and reduces rents, though that is in turn offset by the lift in incomes that follows rate cuts. Demographic trends tended to have a greater impact on rents, particularly in the mid-to-late 2000s when immigration lifted population growth to 2.8 per cent in 2008 from 1.5 per cent in 2005. As a result growth in rents accelerated rapidly to peak at around 4 percentage points above inflation. “The cumulative result was that real rents were 9 per cent higher in 2018 than they would have been otherwise,” the paper found.