Affordability, Not Interest Rates Will Slow Housing Market


Concerns about the impact of a possible interest rate rise on the booming property market may be growing, but opinion is sharply divided over what effect it may have, and when.

A Finance Brokers Association of Australia survey found a 1 per cent rise could have “dire consequences” for the economy and borrowers.

It found 57 per cent of people paying a mortgage did not think they could meet a monthly increase of $300, the approximate change in repayments for the average home loan of $571,992.

But the Reserve Bank of Australia has indicated an interest rate rise was likely to remain at 0.10 per cent in 2022 after dropping to that level in November 2020.

RBA governor Philip Lowe said on Tuesday that current market pricing suggested investors expected most central banks in advanced economies would increase their policy interest rates by the end of 2022, with some, including New Zealand, Norway and South Korea already having done so.

“It is noteworthy that only a modest increase in policy interest rates is anticipated, with rates expected to plateau at what would still be historically low levels,” he said.

“This is consistent with the view that the current increase in inflation is only transitory and that a period of contractionary monetary policy will not be required to return inflation to target.”

Cash rate changes on property prices

Time periodDatesCash rate increaseHouse price increase
0.5 yearsJune-Dec 19942.75%1.1%
1 yearSept 1999-Sept 20001.5%7.5%
1.75 yearsMarch 2002-Dec 20031.0%35.7%
0.75 yearsMarch-Dec 20060.75%8.4%
0.75 yearsJune 2007- March 20081.0%8.9%
1.25 yearsSept 2009- Dec 20101.75%10.5%

^Source: RBA and ABS Residential Property Price Index

Even if the rate went up 2.75 per cent, property prices were likely to keep rising despite concerns for mortgage holders, renters and affordability.

Research by the Property Investment Professionals of Australia found that since 1994, and alongside five periods of rate rises, the value of property prices went up.

PIPA chairman Peter Koulizos said that while the strength or weakness of property markets often had more to do with local economic conditions, including affordability considerations, the data showed that rate adjustments were never the sole underlying reason.

“There has been much conjecture over the past 18 months that record low interest rates are the singular reason property prices have skyrocketed, when the cash rate was already at a former record low of 0.75 per cent before the pandemic hit,” he said.

“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.

“At the end of the day, even when interest rates are low, as they have been for years now, if people don’t have access to finance, it really doesn’t matter what the cash rate is.”

Finance Brokers Association of Australia managing director Peter White said their survey of more than 1000 people, plus research from McCrindle, found mortgage holders needed to look closely at their finances.

“One per cent is not a large increase. It will happen and with the RBA recently deciding not to intervene to stop increasing yields on three-year government bonds, it will likely happen soon,” White said.

The two bodies agreed that affordability would be the main constraint on the market, a sentiment reflected by property researchers as property prices continue to go through the roof.


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