Overview
Much has been written in the press recently about whether or not
we are already in or are on the cusp of a housing bubble in
Australia. House prices are a function of a number of variables
including demand (household sizes and population growth) and supply
(existing and new dwellings), ability to access funding and
affordability (ability to make repayments).
Over short periods of time, demand and supply can fluctuate but
historically equilibrium will eventually be found as more dwellings
are built to accommodate a rise in demand.
Similarly, interest rates tend to fluctuate over time. When
interest rates are low, households may be able to borrow larger
sums and buy more expensive homes. When demand for funds exceeds
supply, the cost of money eventually rises to quell demand until a
new equilibrium is reached. In this instance, long term equilibrium
can be defined as when interest rates are at normalised levels. By
normalised we mean the rate which
