An interesting article by Ross Gittens in the Herald points out that the reason house prices have gone up so much in Sydney is simply that interest rates have gone down.
In effect, people pay what they can afford to pay for scarce commodities, and houses in the east of Sydney (to a lesser extent in the west) are scarce commodities.
When interest rates went down from a high of 17%, it simply meant that the same people were chasing the same houses, but could afford to bid more.
Of course, the big winners are the banks. And the politicians who claim (falsely) that they made the interest rates go down, and that it's a good thing. From the point of view of business, it is a good thing (as long as inflation doesn't soar).
But from the point of view of house owners, the banks end up taking whatever people can afford to pay, regardless the interest rate.
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