Housing Prices VS Bank Interest rates in Australia

Housing prices and interest rates have a direct relation in Australia's financial and economic environment. The country has experienced an upward trend in house prices over the last decade, causing concerns among prospective homeowners and policymakers. In addition, the Reserve Bank of Australia (RBA) plays a significant role in determining the level of interest rates, which affects borrowing and spending patterns amongst Australians. Therefore, this paper aims to explore the relationship between housing prices and interest rates in Australia by providing a brief overview of the two concepts and their respective factors that influence change.

Housing Prices in Australia

Housing affordability in Australia has become a major issue over the last decade, with house prices rising significantly faster than wages. In 2021, the median house price in Australia reached $682,082, which is a 12.7% increase from the previous year (CoreLogic, 2021). This upward trend in house prices is attributed to various factors such as population growth, limited supply, low-interest rates, and changes in government policies.

Population Growth

Australia's population is growing at an increasing rate, and it is projected to reach between 36.8 million and 48.3 million by 2066, an increase of 50% to 100% from the 2016 population (Australian Bureau of Statistics, 2018). The population growth increases the demand for housing, leading to an upward trend in the prices.

Limited Supply

The supply of housing in Australia has not kept pace with population growth. This shortage of supply is partly due to changes in land use regulations and zoning, lengthy approval processes, and high construction costs. This resulted in a supply-demand imbalance, which drove the prices up.

Low-Interest Rates

The low-interest rates environment in Australia has also played a significant role in the rising house prices. Since the global financial crisis of 2008, the RBA has maintained low-interest rates to stimulate economic growth and increase employment rates. However, this policy has also led to an increase in borrowing and spending, including for housing purchases.

Changes in Government Policies

The government policies also have a significant impact on the housing prices in Australia. The availability of government subsidies, grants, and schemes, such as the First Home Owner Grant, encourages the demand for housing. Conversely, changes in policies, such as the removal of negative gearing and capital gains tax exemptions, could reduce demand and consequently lower prices.

Interest Rates in Australia

The RBA determines the interest rates in Australia, and it plays a crucial role in the country's monetary policy. The RBA sets the official cash rate, which influences the cost of borrowing money for households and businesses. It also impacts the exchange rate and the general level of economic activity in the country. The RBA monitors a range of factors when setting interest rates, including inflation, economic growth, and employment rates.

Inflation

Inflation is one of the most critical factors that the RBA considers when setting interest rates in the country. The bank aims to maintain inflation rates within the target range of 2-3% per annum. If the inflation rate rises above this range, the RBA may increase interest rates to cool down the economy and reduce inflationary pressure. Conversely, if the inflation rate is below the target range, the RBA may decrease interest rates to boost the economy and increase price levels.

Economic growth

The RBA also considers the level of economic growth in the country when setting interest rates. If the economy is expanding too fast, the bank may increase interest rates to cool down the economy and prevent inflation from rising too high. On the other hand, if the economy is slowing down, the RBA may decrease interest rates to encourage borrowing and spending and stimulate economic growth.

Employment rates

The level of employment rates is another critical factor that the RBA considers when setting interest rates. The bank aims to achieve full employment, where the unemployment rate is around 5%. If the employment rate is too high, the bank may decrease interest rates to stimulate the economy and create more jobs. Conversely, if the employment rate is too low, the bank may increase interest rates to slow down the economy and prevent inflation from rising too high.

Conclusion

In conclusion, the relationship between housing prices and interest rates is complex, and both are influenced by various factors. Housing prices in Australia have been on an upward trend, driven by population growth, limited supply, low-interest rates, and changes in government policies. On the other hand, interest rates in the country are set by the RBA, and they are influenced by factors such as inflation, economic growth, and employment rates. These two factors have a significant impact on the Australian economy and affect the borrowing and spending patterns of Australians. Therefore, policymakers need to find a balance between these two factors to ensure a stable and sustainable economy in the long term.

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