The academics dismissed out of hand any argument that higher prices are in any way explained or justified by lower interest rates by stating that the 1960s should have prompted an even greater household debt ratio as rates were the lowest on record throughout that decade.
Now, from what I've read, the 1960s was an interesting decade. I always head to Homebush when Townshend, Daltrey or Jagger visit Sydney. The moon landings were also pretty cool. And I'm as avid a reader of academic theory as the next dude.
But when the boffins start drawing analogies between today's debt markets/lending standards and those of more than half a century hence (or worse, household debt ratios drawn from the 1861 Census) then it's probably a good time to pull up the ladder and watch the footie instead.
The work of Hyman Minsky was cited by the academics years ago as proof of a coming property market crash in Australia, noting that bubbles occur when markets reach a stage of Ponzi finance: income flows cover neither principal nor interest charges, and owners become completely reliant on escalating sale prices (capital gains) to make a profit and meet the cost of the debt.
While the cost of capital remains so low, property investors for whom cashflow is a significant concern may easily source property investments which do not entail significant holding costs.
Take the below scenario of an off-the-plan property in Sydney around 11km from the CBD, bought by a middle-income earner, which gives rise to decent depreciation or on-paper losses.
I note in passing that much of this new stock demands a material "newness premium". I'm trying to be polite here - what I really mean is, it's way over-priced. And therefore a capital growth rate of 4% could well be overtly optimistic (click chart).
Naturally, you can argue from now until the cows come home about whether wages and rents will grow and at what pace, whether inflation will hit the implied 2.50% target, whether property prices will stall or fall...or whatever. And, of course, markets are at last pricing in rate hikes by Q2, 2015!
These variables are all arguments for another day. What I'm considering here is the possible cash flows of a property bought and financed in such a manner today (click chart):