Housing price surges can be interest driven

Long-run historical evidence suggests central banks have reasons to worry about the side-effects of loose monetary conditions, he says. 

“During the 20th century, real estate lending became the dominant business model of banks. As a result, the effects low interest rates have on mortgage borrowing, house prices and ultimately financial instability risks have become considerably stronger.”

Coleman says interest rates are an important determinant of property prices when location quality is important, even if the overall supply of new dwellings is elastic.

“In most cities, people are willing to pay on an ongoing basis for the benefits of living in an attractive location, and these rent-equivalents are capitalised into property prices at rates that depend on interest rates,” he says.