What happens to property values as interest rates rise?

June 23, 2022

On the back of a faster and higher expected rise in interest rates, ANZ and National Australia Bank economists have joined the Commonwealth Bank in downgrading their housing price forecasts.

Speaking with realestate.com.au recently, ANZ senior economists Adelaide Timbrell and Felicity Emmett stated that the Reserve Bank of Australia's current path on interest rate rises will lead to a faster reduction in housing prices.

After previously believing there would be drops of 3% in 2022 and 8% in 2023, they have revised their estimates, and now feel there will be a housing price drop of 5% in 2022 and 10% in 2023. 

"This would result in a housing price reduction of around 15% between April 2022 and December 2023. For context, this would leave prices 6% above pre-pandemic levels," said Ms Timbrell and Ms Emmett.

However, even if home prices did fall by the 15% predicted, they would still be higher than at the outbreak of the pandemic. PropTrack data shows property prices increased nationally by a whopping 35.3% between March 2020 and May 2022.

Ms Timbrell and Ms Emmett feel the recent interest rate rises will see borrowers have reduced boring power, which will lead to a reduction in purchase prices. 

"Given that the average borrower has a large savings buffer, we expect reduced borrowing capacity to be the key driver, not forced selling.

"Stronger household income growth, large savings buffers, increasing population growth via immigration and continued economic growth will all cushion the fall in housing prices as interest rates increase," they added.

In a recent television interview, RBA governor Philip Lowe noted that some households are struggling to cope with the higher interest rates on top of already higher fuel and food prices.

Mr Lowe, who also stated that the RBA does not target housing prices, advised that he believes the cash rate will hit 2.5% at some point.

Despite the current constraints, Mr Lowe said many households had built up very large financial safety nets during the pandemic, saving an extra $250 billion over the past two years, and also stated that the number of people falling behind in their mortgage payments is currently declining.

So what happens to property values as interest rates rise? As interest rates rise, there are less people who are able to afford houses in certain price brackets. For example, if someone could afford to buy a $400,000 home at 1% interest they may need to look at $350-360,000 properties if the rate is at 2%.

This means there is a smaller pool of people looking at each price point, and if a seller needs to move their property quickly, they may need to accept a lower price now than they would have two years ago. 

As everyone waits and watches to see what happens next, it is possible that a patient home buyer could reap the benefits of lower house prices in the coming months…

Who is Peta Stewart?

Award-winning conveyancer. Entrepreneur. Business mentor. Women’s cycling advocate. These are just some of the ways Peta Stewart is introduced. What ties them together is a steely determination to help people achieve their life goals and have fun in the process.

In 2004, Peta became the first licensed conveyancer in the Albury Wodonga greater region. Five years later, she launched her own business and started shaking up the industry with a good dose of personality, integrity and humanity.

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