Will property prices dip when rates rise?


Whether you’re looking to buy, sell or hold, you’ve no doubt wondered whether the property market will tumble when interest rates rise. There has been a lot of recent talk of the Reserve Bank of Australia (RBA) increasing the cash rate in 18 months (or so), and fixed rates are already going up as a result. So for the astute investor, now is an important time to learn from the past in an effort to predict the future.

What does past performance tell us?

We all know that past performance does not predict future results; it can however help us prepare for what may lie ahead. According to a Property Investment Professionals of Australia (PIPA) analysis, history suggests that 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.

The PIPA analysis looks at the six periods of increasing cash rate movements between 2010 and 1994, and the corresponding national house price movements. We’ve summarised these below:

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

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

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

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

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

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

So, what clues does history provide?

Unfortunately, if you’re 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 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.”

Can you afford a rate rise?

The good news is the RBA doesn’t seem overly concerned about borrowers being able to afford their mortgages when the cash 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.”

Get in touch if you’d like to know more

The moral of the story? You don’t have to sit around and wait for a cash rate increase to make your next move!

Managing Director of Hallmark Consulting Daran Thomson says many of their clients are currently investing in property, with plans to further expand their portfolio in the New Year.

“Investing in property via an SMSF (Self-Managed Super Fund) is a particularly popular strategy at the moment that offers a host of benefits from zero out-of-pocket expenses to tax-free future capital gains,” says Mr Thomson.

“It can be tricky to navigate though so that’s where the Hallmark team really shines. We work by your side at every step, and put you in touch with our trusted network of financial experts when you need them,” he says.

Give the team a call today on 1300 135 295 for a no-obligation chat about starting or building your property portfolio.