Would A Further Interest Rate Hike Affect Property Prices in Australia

Economists & a few property analysts have predicted that house prices will drop this year and in 2023 due to rising interest rates. However, there is a high possibility that property values will continue to increase. Lets dive right in and look at how past performances combined with our research process helped us arrive to this conclusion.

Australians who have bought a house recently has a mortgage that needs to be repaid with interest. We all know very well there has been an increase in interest rates recently in May 2022 and worry that the Reserve Bank may soon increase interest rates further to reduce inflation. Once inflation takes root, it is difficult to control. Economists fear that rising interest rates will make housing more expensive and lower buyer demand which in turn will lead to lower prices.

It makes sense that rising borrowing costs will lead to lower buyer demand, and consequently prices will fall. This theory is difficult to prove simply because interest rates have fallen consistently since the 90’s, when the standard variable rate for a home loan was over 13%

Over the last 25 years, property prices have risen every time interest rates have dropped. However, history shows that property prices have not fallen when interest rates increased during the same period.

Since 1990, the major banks have increased their standard variable home loan interest rates multiple times. The last increase in the official cash rate was over a decade ago in 2011.

While it is possible that property prices would have risen faster if interest rates had not risen when they did, the fact is that they didn’t fall. This apparent contradiction is due to the fact that most property owners are resilient and immune to interest rate increases. One-third of our housing market is 100% owned with all mortgages paid off and no outstanding debt today.

Most of the owners are older couples and the reason they look to sell in most cases is to downsize. Interest rate increases are not likely to affect this section of property owners.

Another one third of the houses in Australia are owned by Investors and can claim interest on the cost of housing financing against their income. Investors can reduce their income tax by reducing the interest rate they pay. They can also increase asking rents to recover the interest rate increases. These property investors have made significant financial improvements since their purchase, and have likely paid down some of the debt. Therefore, a rise in interest rates does not force them to sell.

Here is an analysis from Simon Pressley who is an independent property market analyst and head of research @ propertyology who discusses the prospects of how house prices could still go up despite the interest rate rise.

When interest rates rise, Only first-time homebuyers are negatively impacted.

When interest rates rise, mortgage stress may be experienced by some highly leveraged first-time buyers in the new suburban first home buyer areas. There is a possibility that for a first home buyer, they may see their property values drop if enough people have to sell, whether it be for financial, personal or family reasons.

One tenth of home-owners are first home buyers. Despite the social and personal impact of these events in the past, local markets have always rebounded into growth within a few months. However, there have been times when the entire housing market has declined in value in the past. This suggests that there must be a different cause.

The Reserve Bank uses interest rate increases to reduce inflation.

Rising interest rates do not affect all home owners. We should instead look at why they have been increased. This is to slow down inflation. Are rising housing prices and inflation linked. Housing prices mainly drop when there is less housing finance available. The rate of inflation has always been in line with housing prices.

Only a small number of property owners are affected by interest rate increases, but property prices rise when inflation rises. Property prices will rise if inflation increases this year.

Still Undecided On Whether To Buy An Investment Property

If you are still unsure about investing in an property because of the initial costs and fees associated with it. Alternate options to make a fixed income through investment is to indirectly invest in the property market. Look out for developments within Australia which offers high fixed return on investments and with your capital being 100% protected against the project, this type of investment might be a good option to start if you have reasonable savings of offer $100,000 to invest.