RBA gurus at work! MC

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'Twin city' effect driving house prices: RBA

By Matt Wade

The boffins at the Reserve Bank have come up with an explanation for a great local mystery: why property prices are so high.

Two RBA researchers have written a paper exploring why Australians sink more of their wealth into their homes than those in other comparable countries.

They say it is because of the unusual concentration of population in two big cities - Sydney and Melbourne - where most employment opportunities exist. This tends to drive up average prices across the board.

The research paper, from the RBA's economic research department and entitled "City Sizes, Housing Costs and Wealth" was released yesterday.

"The expensive cities in Australia drag up the average level of dwelling prices more than in other countries, resulting in a higher share of wealth concentrated in housing," it said.

The authors argue their findings have significant implications for macroeconomic policy in areas such as savings-investment, provision for retirement and the growth in, and distribution of, wealth.

The paper shows home prices in Australia are high relative to household income but dwellings in Australia are not noticeably better than those in comparable countries.

It is conventional to assume that government incentives must have something to do with the high level of housing investment but the RBA study shows that Australian government policy in this area is not much different to other similar counties.

Instead, the unique population structure focusing on the great urban rivals, Sydney and Melbourne, is being held responsible.

"Given the urban structure of Australia and the concentration of high-income employment opportunities in just two cities, it seems likely that Australia will continue to have a pattern of household wealth being concentrated in dwellings," the paper said.

However, there is some good news for potential entrants to the Sydney property market - the paper says that the ratio of dwelling wealth to income should stabilise, or begin to grow more slowly, in the future.

The "twin city" effect made houses in Australia much higher than those in the US. "This may suggest that dwelling prices are too high in Australia and must ultimately fall relative to household income," it says.

The authors were quick to add there was little prospect of a sudden crash in dwelling prices.
 
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Reply: 1
From: Michael G


Hi,

I must say that paper doesnt seem to say much.

Wonder what they will say, if there's a correction in prices due to an overheated market.

"Prices have dropped due to an expectation in prices brought about a paper issued by the RBA last year..."

Regards
Michael G.
 
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