In a first for the nation, the Reserve Bank has mapped out the Australian housing market to better understand the role interest rates have played in the recent housing market boom.
In a new report released in Monday, the RBA found that low interest rates and significant population growth driven by high immigration both played key roles in the housing boom seen over the last five or six years.
The report’s modelling tracked the cash rate from its high point at 4.75 per cent in 2011 to its current rate of 1.5 per cent, and looked at the impact rates had on the cost of housing, investment, rental vacancy rates, and rent prices had rates remained at their June quarter 2011 levels.
“The model estimates that the reduction in real interest rates accounts for most of the subsequent boom in dwelling prices and a large part of the boom in dwelling investment,” the paper found.
The additional increase in housing supply which stemmed from this should have increased the vacancy rate and subsequently lowered rents, but the RBA noted that “these effects are offset by the effect of higher income” leaving both vacancy rates and rents not much changed on net.
The reports modelling also implied that housing prices are “one of the largest channels” through which changes to the interest rate affect Australia’s GDP.
The mid to late 2000s saw an increase in population growth which was driven by “a surge in immigration” resulting in year-end adult population growth increase from 1.5 per cent in 2005 to 2.4 per cent in 2008.
“By 2018, [the population surge] boosts the adult population by 3.3 per cent. With per capita income unchanged by assumption, total income and hence dwelling investment also increase by about 3.3 per cent. This raises housing supply slightly,” the paper said.
“However, the short-run boost to housing demand is much larger, leading to a fall in the rental vacancy rate to a near-record low of 1.5 per cent in 2008.”
Ultimately, the RBA estimates that the surge in population accelerated the rate of rent growth and ultimately made rents “9 per cent higher in 2018 than they would have been otherwise”