Who tripped the housing boom?

PHOTO: A large run up in prices across Sydney and Melbourne were first indications that a range of borrowers were converging on the market, bolstered by lower rates. Source: News Corp Australia

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.”