Australia’s record high housing prices were driven by low interest rates, central bank study shows
- Research from Reserve Bank of Australia suggests that a further drop in interest rates could revive falling home prices
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.