Economists don’t understand residential real estate very well and they’re scratching their collective heads over why prices keep rising when interest rates are high.

Here’s a couple of simple things to help them out: one is that, historically, there’s no evidence that rising interest rates lead to falling property prices. There’s nothing unusual about what’s currently happening in Australian property markets.

But the key factor is that we have very high demand for real estate, fuelled by record population growth, at a time of incredibly low supply.

The rental shortage is well documented.

But another statistic that depicts under-supply is the incredibly low level of listings in many parts of the nation.

The number of homes for sale is at dramatically low levels.

In June, the number of national residential property listings decreased by 8.3% compared to May.

Part of that was a 13% decline in the number of new listings of homes for sale, according to SQM Research.

Notably, all major cities experienced a decrease in their listings in June.

Adelaide recorded the largest monthly decrease in total listings, falling by over 15%. Melbourne and Perth followed, both recording decreases of 12%.

Perth recorded the largest annual decrease of 32%, while Adelaide, Brisbane and Darwin also had big falls in the number of homes for sale.

The data on listings correlates generally with the results we are seeing with prices.

The cities with the biggest declines in the number of properties for sale – Perth, Adelaide and Brisbane – are the ones with the major escalation in prices.

Cities where listings remain higher than a year ago – like Melbourne, Canberra and Hobart – are the weakest performers on price growth recently.

In Melbourne, for example, listings are 12% higher than a year ago.

It illustrates, yet again, that we don’t have a single property market in Australia, but lots of local markets doing different things.

And it also shows that supply and demand factors will override other issues, such as high interest rates.

A new factor now coming into the equation is the Federal Government’s tax cuts, which are likely to add to demand and put further upward pressure on prices by increasing borrowing capacity.

According to an analysis done by Shore Financial, borrowing capacity would increase by 4% for those with an income of $90,000 and 5% or more for those with an income of $100,000 or more.

According to Mortgage Choice, the borrowing capacity of a buyer with a $100,000 income could increase by about $25,000 while someone earning $150,000 could borrow about $37,000 more.

In the meantime, the capacity of Australians to cut through all the barriers and buy real estate is shown in the lending figures – including the rise in the size of the average loan, which now sits at $625,000.

Sally Tindall, research director at comparison website, RateCity.com.au., says this:

“Over the last two years, buyers have seen their maximum borrowing capacity plummet, in some cases by hundreds of thousands of dollars, as a result of the RBA hikes, and yet the average new loan size has hit a new record high.

Tindall says: “It’s astounding to think owner-occupiers are, on average, taking out larger loans than ever before, despite the fact the cash rate is sitting at a 12-year-high.”

Maybe it’s not so astounding, given that demand from owner-occupiers and from investors remains high and supply continues to be low, putting further upward pressure on prices.