Housing, Interest rates and the Australian economy

The inter-relationship between the health of the economy and interest rates is an incredibly important and often discussed topic. And recently in Australia the link between these and the housing sector has been heavily scrutinised. Penm et al. (1994, p. 241) have even suggested “housing activity is a leading indicator of general economic activity”. In the Australian economy, the housing market is booming, some believe out of control. Whether or not the boom is sustainable is a topic which has serious consequences for the growth or contraction of the economy, and where opinions differ wildly.

The housing market has been experiencing a new high recently. Lenders lent a record $9 billion in March to people buying, building or refinancing their homes (Colebatch 2003). This increase in demand for housing has pushed up the cost for some first homebuyers to a prohibitive level. The prices for housing are experiencing 20 per cent to 25 per cent annual growth (Dempster 2002). Th...