The Urban Developer
AdvertiseEventsWebinarsUrbanity
Industry Excellence
Urban Leader
Sign In
Membership
Latest
Menu
Location
Sector
Category
Content
Type
Newsletters
A one-day deep dive on office, retail, healthcare, childcare and alternative sectors
UPCOMING | COMMERCIAL REAL ESTATE SUMMIT
LEARN MOREDETAILS
On Demand

Fireside Chat | Inside GemLife With Adrian Puljich

Building Australia's Newest Airport: Multiplex

The Makers Of The Mondrian | Design, Vision And Delivery Behind One Of Australia’s Most Anticipated Luxury Hotels

Next Gen Now | How Emerging Developers Are Redefining The Game

View All >
Latest News
Scape RMIT PBSA
Student Housing

Scape Eyes University Campus Accommodation Takeovers

Leon Della Bosca
5 Min
Plans for 3-7 River Terrace, tweed heads by turner for briscoe hotel group
Placemaking

Briscoe Greenlit for ‘Transformative’ Tweed Project

Renee McKeown
2 Min
Real Estate

How Rising Costs are Rewriting Portfolio Strategies

Partner Content
6 Min
Placemaking

Queensland Seeks Developer for South Brisbane Visy Site

Lindsay Saunders
3 Min
View All >
Events
Lunch

Women’s Leadership Lunch

Summit

Commercial Real Estate Summit

Summit

Urban Leader Awards

One-Day Course

Property Development Masterclass | Melbourne

View All >
TheUrbanDeveloper
Follow
About
About Us
Membership
Awards
Events
Webinars
Listings
Resources
Terms & Conditions
Commenting Policy
Privacy Policy
Republishing Guidelines
Editorial Charter
Complaints Handling Policy
Contact
General Enquiries
Advertise
Contribution Enquiry
Project Submission
Membership Enquiry
Newsletter
Stay up to date and with the latest news, projects, deals and features.
Subscribe
SHARE
33
print
Print
OtherTed TabetMon 11 Mar 19

Interest Rates Dictate House Pricing: RBA

c0165e9b-5023-4d87-8152-f37c20b9c5ee

A new report from the Reserve Bank of Australia says that, more than any other factor, shifting interest rates are responsible for weakening house prices and construction rates.

House prices dropped almost 7 per cent nationally across capital cities in the 12 months to January, with Sydney leading the biggest decline at almost 10 per cent.

Just last week, RBA governor Philip Lowe downplayed the impact of house price declines, declaring that the adjustment was “manageable”, theorising that the origins of the current correction in prices “do not lie in interest rates and unemployment”.

Lowe said while low interest rates had increased the capacity of people to borrow, he pointed to population growth and the slow supply of new properties as the main reason behind the surge in prices.

The sentiment now conflicts with newly-released research by RBA economists Trent Saunders and Peter Tulip who ran a model looking at the primary influences for house prices, which are at risk of falling a further 10 per in 2019.

Analysts stated that changes in interest rates, not supply and demand were responsible for waning house prices.

Related: Reserve Bank Eyes Cash Rate Cut

More than any other factor, shifting interest rates are responsible for weakening house prices and construction rates, according to RBA analysis.


“We build an empirical model of the Australian housing market that quantifies interrelationships between construction, vacancies, rents and prices,” RBA analysts said.

“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.”

“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 report’s modelling mapped the cash rate from its high point at 4.75 per cent in 2011 to its current rate of 1.5 per cent, looking closely at the impact rates had on the cost of housing, investment, rental vacancy rates, and rent prices.

Analysts found that a single percentage point cut in interest rates lifted house prices by 8 per cent in the two years after the change.

Without the reduction in interest rates, the model suggests Australia’s dwelling prices to income ratio would have been substantially lower than where it is today.

Outside of interest rates, the model suggests that faster population growth, primarily reflecting strong growth in immigration, has also contributed to higher dwelling prices to a lesser extent.

House building, apartment building, engineering and commercial activity all experienced falls in February, with house building contracting falling at its fastest rate in more than six years.

“Construction activity is approximately co-integrated with income, although the housing stock is not,” RBA analysts said.

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

“It is changes in interest rates and in existing housing prices that drive construction, not their level.”

Last month, the RBA decided to leave official rates steady at 1.5 per cent following its first meeting of the year, a decision that marks 30 months of no movement.

NAB said it anticipates house prices to decline further over the next year or so, with peak-to-trough falls of around 15 per cent in Melbourne and Sydney.

And in his latest market update AMP chief economist Shane Oliver revised his forecast lower to total falls of 25 per cent, from earlier predictions of 20 per cent, in Sydney and Melbourne.

ResidentialAustraliaReal EstateSector
AUTHOR
Ted Tabet
The Urban Developer - Journalist
More articles by this author
website iconlinkedin icon
TOP STORIES
Sud-slingers are back in action in 2025, with the Sydney market recovering after years of disruption.
Exclusive

Sydney Pub Market Rebounds After Post-Covid Lows

Patrick Lau
5 Min
Gelephu Mindfulness City: Bhutan how a city of the future is planned
Exclusive

Bhutan’s Mindfulness Masterplan Resetting How Cities Work

Renee McKeown
8 Min
Long Bay Correctional hero
Exclusive

Time to Rethink: Fresh Bid to Unlock Prison’s Prime Site for Homes

Clare Burnett
7 Min
Inside NSW Housing Divide-Mosman
Exclusive

‘The Machinery Underneath is Broken’: Inside NSW’s Housing Divide

Vanessa Croll
9 Min
Exclusive

Queensland Decade of Gigaprojects a Developer’s Goldmine

Phil Bartsch
5 Min
View All >
Article originally posted at: https://www.theurbandeveloper.com/articles/interest-rates-dictate-house-pricing-report