New research released by the Reserve Bank has a theory on what really caused — and scuttled — the Australian housing boom.
Forget immigration, investors, fixer-uppers, downsizers, Baby Boomers, and everything else, the latest RBA research paper — A Model of the Australian Housing Market by Trent Saunders and Peter Tulip — implicates the central bank itself in what’s became largely unsustainable double digit house price growth. That is, the RBA using one of the most closely watched tools in its arsenal — movement in the cash rate target.
“Since 1982, real dwelling prices have grown at an average annual rate of around 3 per cent, approximately tripling in value,” the paper found, and it said about 45 per cent of the jump in prices came off lower interest rates.
A large run up in prices in the two biggest capitals, Sydney and Melbourne, was the first indication that a range of borrowers were converging on the market bolstered by lower user costs — spreading to cities as far apart as Brisbane to Hobart, and the Gold Coast to Perth.
“Most of this fall reflects a decline in expected real mortgage rates from a peak of 6 per cent in the 1980s to 3.2 per cent recently. Holding rents and other components of the user cost constant, this would account for a 45 per cent increase in housing prices.”
It was the perfect storm and RBA was the Captain.
“Since its peak in 2011, the cash rate has fallen from 4.75 per cent to 1.5 per cent, while the user cost has fallen from almost 5 per cent to around 3.5 per cent,” the paper said.
“The model estimates that the reduction in real interest rates accounts for most of the subsequent boom in dwelling prices (middle left panel) and a large part of the boom in dwelling investment (middle right).”
“The increase in housing supply boosts the vacancy rate and reduces rents. However, these effects are offset by the effect of higher income, with neither the vacancy rate (bottom left) nor rents (bottom right) being much changed on net.”
The paper was released “to make the results of the current economic research within the Reserve Bank available to other economists” to “encourage discussion and comment”.
And comment they have: One user calling it “utter cra*” while another mocked its simplicity saying “I only studied Economics at a loser university and didn’t get a PhD but seem to recall the price of money being an important driver of demand”.
Several others called for more focus to be placed on fiscal policy including Brisbane’s Stephen Moriarty who tweeted “please can we discuss fiscal policy as well? Australia has ample room for increasing fiscal policy and bolstering the economy. It’s not all just about how far the RBA can cut rates”.