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

Interest rates are a key driver of house prices, an RBA paper says - Google Search

Changes in interest rates are the primary driver behind the movement in house prices and not supply and demand, according to a Reserve Bank paper that appears to contradict the bank's governor.

The most significant driver behind house prices and the level of construction was interest rates, says an analysis A Model of the Australian Housing Market by RBA analysts Trent Saunders and Peter Tulip.

They say that other factors such as economic growth, population growth, construction costs, depreciation, the price of vacant land, rents, and the user cost of capital have a smaller effect

"The strong and clear response of residential construction to interest rates is evidence of the potency of monetary policy," the report says.

"Interest rates have a large and highly significant direct effect on construction activity."

"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."

"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."

 

"In other news, RBA governor has received 3rd degree burns after his pants inexplicably erupted in flames"