New RBA report on House Prices released September 2011

Reserve Bank report: Urban Structure and Housing Prices:Some evidence from Australian Cities

In a new discussion paper, the Reserve bank draws attention to some structural factors that may have contributed to developments in the Australian housing market in recent years.

In relation to the impacts on housing prices in Australia, the report reflects on important factors affecting the ‘supply side’ of property,

“While demand-side factors, especially changes in the cost and availability of finance, have clearly been very important in explaining developments in the Australian housing market over the past two decades, our results lend support to other [supply-side] work pointing to the role of structural factors in influencing housing market outcomes. There is a growing body of international evidence on the role of supply-side constraints in limiting construction and driving up prices…The evidence for Australia presented in Section 4 is also consistent with various supply-side aspects boosting the cost of housing…”

This analysis could provide support for future calls for increases in and more efficient public infrastructure investment. For example, better and faster approval processes, higher urban densities, reduced property development impediments and taxes – enabling major cities to accommodate higher populations, rather than forcing prices of existing property higher, without attention to improving the supply of appropriate property to house the increased population.

One can assume the RBA’s research is aimed at finding explanations for, and avoiding a continuing divide between the intrinsic value of assets – that is, houses in this case, and the appreciation of prices as a result of poor consumption and investment decisions on the part of consumers. When consumers have easy access to credit, the Bank may feel it is easier to make poor investment decisions when buying property.

Perhaps the bank in its study is also motivated to explain or reveal that its own policy tools, designed through interest rate regulation to influence the economy and its demand for money as either an expansionary or contractionary measure (contractionary especially in relation to attempt to modify inflation) are not well designed to address all the factors that ultimately affect house prices. Interest rates and credit growth can affect house prices, but prices are also strongly influenced by government planning methods, infrastructure spending, and treatment of land zoning and release.


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