Interest Rates, Local Housing Markets and House Price Over‐reactions

Abstract

Understanding the effects of interest rates on city‐specific house price to household income ratios is important for managing local housing markets. In particular, there is concern that keeping interest rates at sufficiently low levels can distort the relationship between local house prices and fundamentals. We use house price to income ratios across capital cities in Australia to investigate this issue and show that there is a national interest rate ‘transition’ point below which housing dynamics can become unstable. This result lends support to the presence of a duration‐dependent threshold effect (hitherto mainly explored in theoretical models).

The Role of Tax and Subsidy Policy in Driving Australian House Prices

“…This is consistent with research showing that mortgage holders and house buyers seem to have widely differing sensitivities to interest rate hikes by location (Otto, 2007;Lim & Tsiaplias, 2018). This is consistent with research showing that mortgage holders and house buyers seem to have widely differing sensitivities to interest rate hikes by location (Otto, 2007;Lim & Tsiaplias, 2018).…”

“…Spatial analysis of the Australian housing market has been examined by Ma and Liu (2014), Akimov et al (2015) and Lim and Tsiaplias (2018). Spatial analysis of the Australian housing market has been examined by Ma and Liu (2014), Akimov et al (2015) and Lim and Tsiaplias (2018).…”

“…More recently, researchers have been motivated to identify spatial relationships between housing markets across Australia. Spatial analysis of the Australian housing market has been examined by Ma and Liu (2014), Akimov et al (2015) and Lim and Tsiaplias (2018). Whether using methods traditionally associated with the business cycle literature or explicit convergence models, the common finding in this literature is that there is substantial differentiation in house price drivers.…”

The Australian Economy in 2019–20: Slower Growth, Record Low Interest Rates and a Changing Housing Landscape

“…Finally, there is a downside risk that consumers respond to lower rates in a manner that predominantly facilitates asset price appreciation. This type of reaction has been observed in Australia before (Lim and Tsiaplias 2018) and is likely to draw away from consumption expenditure, placing additional pressure on other parts of the economy.…”

“…In attempting to offset relatively low inflation and wages growth, the RBA has recently cut back its cash rate to 0.75 per cent. There is some evidence suggesting that lowering credit costs has historically been associated with increased speculation in housing (and financial) markets, primarily by influencing the typical relationship observed between prices and fundamentals (Lim and Tsiaplias 2018). In the current economic climate, it is likely that the recent easing will curb any further house price depreciation that may otherwise have taken place.…”