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Falling interest rates were the major catalyst for rising housing prices across Australia according to new research published on Monday by the Reserve Bank. The new findings come just a week after the RBA’s governor Philip Lowe said the rate cuts had not had a notable impact on house prices during the early to mid-2010s.

While home prices have been on a downward trajectory in recent months, that correction followed an extended boom period where home prices soared across the country. The major cities of Sydney and Melbourne experienced the largest hikes, where prices climbed by 75% at the peak in 2017.

While Dr. Lowe had recently argued that population growth and a restricted supply of new properties had played the biggest role in price increases, RBA economists Peter Tulip and Trent Saunders revealed this week that their new research shows the rate cuts were actually the driving force.

The study found that just a single percentage point cut resulted in an 8% rise in property prices. The RBA began its cutting drive back in 2011 when its rates were a comparatively high 4.75%. A number of interventions since then has seen that rate cut to 1.5% but the Reserve is expected to make further cuts this year due to concerns about a drop off in economic growth and the slump in property prices.

“We build an empirical model of the Australian housing market that quantifies interrelationships between construction, vacancies, rents and prices,” Mr. Saunders and Mr. Tulip, researchers at the RBA, said in a statement. “We find that 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 model built by the economists found that the boom in household building would not have been nearly as pronounced during the last five years if interest rates had not been reduced, as would the country’s dwelling price to income ratio. The imbalance prompted a supply response from developers. 

Saunders and Tulip added: “The model estimates that the reduction in real interest rates (actual interest rates, less inflation) accounts for most of the subsequent boom in dwelling prices and a large part of the boom in dwelling investment. The increase in housing supply boosts the vacancy rate and reduces rents.”

History appears to be repeating itself as the RBA opted to cut rates back in 2011 due to the impact of the global recession, rising domestic unemployment and inflation that stuck rigidly below the RBA’s target. Analysts now expect the bank to intervene again this year after Australia’s economy entered a period of contraction on a per capita basis during the second half of 2018. The RBA has also failed to lift inflation near its target.

The new research also looked at the impact of a period of stagnation or decline for housing prices in Australia and the primary takeaway is that there would be long term economic damage. It found that a failure of prices to continue upward at a real rate of 2.5% annually could spook investors and eventually lead to plummet in value of in excess of 30% during the next six years.

The authors said this was “extremely unlikely” to happen as Australia had never experienced anything of that scale before but cautioned that the scale of duration of such a collapse would mirror those seen in countries such as the United States and Spain during the financial crisis a decade ago. For this reason, the economists said it was a relevant “worst-case” scenario to be wary of.