Will Australian property prices drop from 2022 Interest Rate Rises? Maybe.

Whether you’re looking to buy, sell or hold, there’s a good chance you’ve wondered whether the property market will tumble when Australia’s interest rates rise, right? Today we’ll look at what happened to house prices when the Australian interest rate were hiked in the past, give an analysis of property prices in Sydney, Melbourne, and Brisbane, and give some recommendations for your property portfolio.

Let me give a quick recap for those who haven’t been reading the Australian Financial Review headlines lately before jumping straight in.. Australia’s 2021 Interest Rates have been the lowest on record, due partly to RBA’s generous cash rates of 0.10% and quantitative easing. However, from November 2021 Annual inflation rate of 3.0% (historically we were between 1-2% in the 2010s), there’s renewed predictions of Reserve Bank of Australia cash rate rises. This is to help combat inflation outside the 2-3% inflation rate target. If you want a more in-depth look at potential forecasts for interests rates, we have published an article on the RBA’s 2022 and 2023 Interest Rates here. Also, fixed rates with CBA and ING have been raised as well. We have an article giving the rationale behind those changes. Today, however, we are going more in-depth into the impact these changes have on inflation.

So with all the recent talk of the Reserve Bank of Australia (RBA) increasing the cash rate in 18 months (or so), and fixed rates already going up as a result, now’s an important time to look at what has happened to property prices when Australian interest rate hikes occured.

What does history of Australian Interest Rate Hikes show us?

History suggests that Australian interest rates do not force property markets into booms or busts, rather it’s often affordability, local economic conditions, consumer sentiment, or access to lending that does, according to a Property Investment Professionals of Australia (PIPA) analysis.

The PIPA analysis looks at the six periods of increasing cash rate movements since 1994, and the corresponding national house price movements, which we’ve summarised below:

June 1994 to December 1994: Cash rate increase: 2.75%. House price increase: 1.1%.

September 1999 to September 2000: Cash rate increase: 1.50%. House price increase: 7.5%.

March 2002 to December 2003: Cash rate increase: 1.00%. House price increase: 35.7%.

March 2006 to December 2006: Cash rate increase: 0.75%. House price increase: 8.4%.

June 2007 to March 2008: Cash rate increase: 1.00%. House price increase: 8.9%.

September 2009 to December 2010: Cash rate increase: 1.75%. House price increase: 10.5%.

So what can we take from those figures on Australia’s property prices?

Well, for starters, for those holding out for a cash rate rise in the hope of buying during a price dip, history is not on your side – not once did house prices fall during the above periods.

PIPA Chairman Peter Koulizos says the strength or weakness of property markets is often influenced by more than just cash rate adjustments.

“There has been much conjecture over the past 18 months that record-low Australian interest rates are the singular reason why property prices have skyrocketed, when the cash rate was already at a former record low of 0.75% before the pandemic hit,” Mr Koulizos pointed out.

“There are clearly a number of factors at play, including some buyer hysteria I’m afraid to say, but one of the main reasons for our booming market conditions is easier access to credit, which was simply not the case two years ago when rates were also low.”

Most borrowers can also afford a cash rate rise: RBA and PIPA

The RBA doesn’t seem overly concerned about borrowers being able to afford their mortgages when the cash rate rises. This comes from the tolerance of household budgets to Australian interest rate rises.

RBA assistant governor (economic) Luci Ellis recently told a parliamentary committee that the majority of borrowers were paying off more of their home loans than required by their contracts, particularly during COVID.

“People have been socking away money in offset accounts and redraw accounts during this period. And particularly where you had lockdowns, some people were not spending as much as they ordinarily would,” Dr Ellis explained.

“If and when rates do eventually rise, a lot of people will not actually need to raise their actual repayment, because they’re already paying more than they need to.”

It’s a sentiment shared by Mr Koulizos: “While we don’t expect rates to rise for a year or two yet – and when they do, they are unlikely to ramp up rapidly – the monthly mortgage repayments on an (average) $574,000 loan may increase by about $73 per week if the interest rate increased one percentage point.”

What this means is that the Reserve Bank of Australia beleives increasing it’s cash rate, and subsequently Australia’s interests rates, won’t cause a readjustment in any spending in housing. This comes as the inflation uncertainty is already “priced in” towards fixed rate interest rate and increases will have a minor effect.

Get in touch if you’d like to know more about Australia’s Interest Rate setting and what that means for your property:

The moral of the story? You don’t have to sit around and wait for a cash rate increase to make your next move. Australian interest rates are pricing in the uncertainty surrounding 2022 to 2023, so it’s best to act now!

If you’re looking to crack the property market with your first purchase, get in touch today and we can run you through a number of government schemes that can help make it easier for you and find the best interest rate.

And if you’re already a homeowner and are concerned about what an increase in the cash rate might mean for your current mortgage (or next purchase), we’d be happy to run you through a number of options available, which could include fixing your rate, or putting extra funds into an offset account in advance.

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