A new research paper from the Reserve Bank of Australia is likely to stoke the fierce debate about so-called property bubbles in Sydney and Melbourne by highlighting the key role that supply plays in determining housing price growth.
The research paper 'Long-run trends in housing price growth' notes that an important factor for housing price growth is the ability of the supply of new dwellings to respond to changes in demand.
"In the short run, the demand for housing can change more quickly than the supply of housing, and so housing prices will need to adjust temporarily to equilibrate housing demand and supply," Marion Kohler and Michelle van der Merwe wrote in the paper.
"As new dwellings are built, all other things equal, downward pressure is placed on prices until supply and demand are equilibrated in the long run."
The paper concluded it was unlikely there will be a return to the rather extreme conditions of earlier periods when significant increases in household debt supported high housing price growth.
"Nonetheless, protracted periods of changes in population growth that are not met by adjustments in dwelling supply could lead to periods of sizeable changes in housing price growth," the paper said.
The paper said the significance of the issue has been made clear by the recent increases in higher-density housing and the lower growth of those prices relative to values for detached houses, where supply changes have been less responsive.