Low interest rates not to blame for property bubble
The Reserve Bank of Australia has rejected the notion that ultra-low official interest rates are stoking unsustainable house price increases. Instead, they suggest a failure to supply new homes to a rapidly rising population is a bigger factor. The central bank even said that it has concerns that the increased demand for housing in the long-run will not lead to an increase in supply to match.

Far more worryingly – from the Reserve Bank's point of view – is a long-run increase in population rates that potentially fails to trigger an increase in the supply of housing.

High population growth and a lack of supply could lead to "periods of sizeable changes in housing price growth," wrote Marion Kohler and Michelle van der Merwe, the two officials at the central bank who did the work.

New home construction

Crucially they argue that even if lower mortgage rates spur buyers into the property market sooner than they otherwise would, an inevitable surge in new home construction will ultimately cool price gains.

"In the long run, even if mortgage rates were to remain low for an extended period of time, there should be a supply response to help move the market back into its longer-run equilibrium," the researchers said.

"Indeed, the reduction in real mortgage rates since 2011 – following reductions in the cash rate – has been closely associated with both stronger housing price growth and strong dwelling construction more recently."

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The findings are supported by preliminary recent evidence across the property market, where price gains appear to have slowed, construction has surged and auction rates are declining.

Three decades of data

Over the past three decades, house prices have increased on average by 7.25 per cent a year, and by around 7 per cent since the early 1990s.

In the 1980s, the RBA found annual house price inflation ran at close to 10 per cent – as did inflation more generally, making price gains in real terms relatively modest at 1.4 per cent a year.

During the 1990s to the mid-2000s, prices far more strongly at 7.2 per cent a year on average in nominal terms and 4.5 per cent after inflation.

Over the past decade annual nominal prices rose at a little over 5 per cent and 2.5 per cent in real terms.

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The research attempts to explain the differences between price changes across those three periods.

"During the 1980s, housing price inflation broadly followed general price inflation in the economy, which was relatively high and volatile," Kohler and Van der Merwe said.

In the subsequent period – following financial deregulation in the mid-1980s and disinflation of the early 1990s, cheaper and easier access to credit supported a structural rise in how much households were prepared to borrow for homes. That helped spur the high pace of property inflation through to the mid-2000s, they suggest.

Since then, over the past decade, debt-to-income levels have stabilised while population growth driven by strong immigration and the trend towards smaller household sizes have seen underlying demand exceed the supply of new homes, the research argues.

"One important factor for housing price growth is the ability of the supply of new dwellings to respond to changes in demand," the authors said.

"The significant of this is made clear by the recent increases in higher-density housing and lower growth of those prices relative to prices of detached houses, whose supply has been less responsive."