Why Sydney and Melbourne housing is so expensive

The Reserve Bank of Australia (RBA) has released new research which attempts to explain why dwelling values respond much more to interest rate changes in some parts of the country (e.g. Sydney and Melbourne) than others:

We know that housing prices vary substantially across different parts of the country. The average price of housing is higher in Sydney, for example, than it is in Hobart. We also know that changes in interest rates have an effect on housing prices. When the RBA lowers the cash rate housing prices typically end up higher than they otherwise would have been. These two facts have been well documented, but what we don’t know is how these two facts fit together. For example, when the RBA lowers interest rates, is the change in housing
prices larger in Sydney than in Hobart? And what are the factors that explain any differences in the response of housing prices to interest rates across the country?

In this paper we examine how monetary policy affects housing prices across local areas. We explore three related questions:

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