In the Research Paper published by Economic Research Department of the Reserve Bank of Australia, the economists explained that low-interest rate has been the leading factor for the rapidly growing housing prices and construction across Australia in the past few years. This Research titled ‘A Model of the Australian Housing Market’ was published by RBA on Monday, 11 March 2019.
But it seems the Reserve Bank of Australia does not rely on its own research report as the governor Philip Lowe has recently blamed the deficit supply in the Australian housing market for the sharp rise in house prices.
Dr Lowe stated that the housing supply is the major dynamic that has been trending at a very slow pace in response to the strongly growing population of Australia, as per the report of the Australian media company.
This statement surfaced the controversial view of the government across the entire financial sector of Australia. It is evident to say that the difference in RBA Research Report and the statement of RBA Governor Philip Lowe has left the industry with ‘mixed message’.
The research model suggests that the fall in interest rates can explain much of the strength in housing prices and construction over the past few years, some of this fall reflects lower world real interest rates and some is cyclical.
Few market participants believe that this ‘mixed message’ may be the reason for the communication gap within the body. But that’s really hard to digest!
Lowe can clearly be seen putting off the onus from monetary policy in the role of the housing market. So, is it the mere lack of communication or Dr Lowe is trying to ignore the pink elephant in the room for some political reason?
The leading economists are of the opinion that it is always safer for the government to give the broad macro-economic view of the situation rather than to base it on critical factor like interest rate to make it more precise and accurate. And the population is one of the most easy factors to play around.
Australia’s official cash rate stands at 1.5% that marks the historically low rate remaining unchanged since August 2016.
The link between interest rate and housing prices could be closely related to the liquidity available in the market. The research report read that the construction activity was observed highly responsive to changes in interest rate and the changes in current housing prices. It stated that the strong and clear response of residential construction to interest rates is evidence of the potency of monetary policy which further contrasts with the weak and imprecise response of other components of GDP.
It can be understood that due to the loose monetary policy, the Australian housing market has been reaching the peak. However, the prices softened in 2018 putting the two biggest cities of Australia on the downside. The fall of 1.5% was noted in the residential property prices at the end of September 2018 quarter in comparison to the June 2018 quarter, mostly driven by the property prices decline in Melbourne and Sydney.
Also Read: Australian Housing Market may fall in 2019
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