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The Role of Interest Rates in Housing Bubbles
The mainstream near classical consensus in Australia, is don't worry about high price to rent ratios. It's because interest rates have been low and declining since the late 1980s when they were incredibly high. And if you're real interest rates are lower, the discount rate by which you're capitalizing rents into prices is lower,. therefore we should expect to see higher prices and higher price to Rent ratios. My response is that relies on a rational expectations assumption. I'm not entirely convinced that the present value relation is the model of the economy in the public's mind. To me that seems like a narrative driving people's belief and rationalizing the elevated house prices. That's perfectly consistent with the fact