While many homeowners are keeping a watchful eye on the property market, how long will it take for interest rates to start affecting the world of real estate?
With the dust finally starting to settle after the recent election results, let’s not forget that there’s also two other big variables that are affecting the property market: buyer fatigue from soaring house prices, and the inevitable interest rates that stem from a stabilizing economy.
After keeping interest rates firmly anchored at 0.1% for more than a year, the Reserve Bank Of Australia has finally begun unwinding its pandemic-era cuts in line with inflation soaring. Although May’s 25 basis point increase is expected to be the first of many, how long will it take until changes to interest rates start to influence the property market?
The Relationship Between Interest Rates And Property Value
As most homeowners need a mortgage to buy a house, higher interest rates will eventually increase the cost of borrowing, and therefore reduce the borrowing capacity that the average person can access.
Even for investors who might opt to purchase property with cash, higher interest rates will increase their expectations linked to investment returns on their cash if they went down other investment paths, and could reduce their willingness to dabble in real estate.
According to AMP Capital Chief Economist, Dr Shane Oliver, cash rate changes in the past had taken multiple months to make a notable impact on the property market. However, that lag has now narrowed because of high debt to income ratios and record breaking property prices.
“Traditionally, it takes a while for higher interest rates to hit because they’re usually offsetting good news with higher employment and rising wages,” Dr Oliver said, adding there had been an eight-month lag between the first rate hike back in 2009 and weaker prices.
“The complication this time around is that the lower fixed mortgage rates have played a much bigger than normal role in driving the boom in the first place.”
Either way, almost every economist in the country is saying to expect further interest rate rises and traditionally, the higher interest rates go, the more property prices fall. This is because they have the potential to cause mortgage stress, and even cause more properties to return to the market, which in turn will help to alleviate the lack of supply.
However, rising interest rates aren’t likely to have the same ripple effect in every corner of the property market. Those who are the most concerned tend to be those with newer mortgages in inner city pockets of Sydney and Melbourne, who have taken on higher debt levels than they might have liked to as a means to keep up with rising property prices.
In comparison, those in regional and rural parts of Australia are far less likely to be exposed to drops in property value. While prices in Sydney and Melbourne have dipped for the first time in two years, the numbers tell a different story for properties that are away from the cities.
This is particularly noticeable in pockets in Victoria, which have experienced strong migration from Melbournites and limited housing supply. It’s also worth keeping in mind that not all homeowners have a mortgage though, and that many retirees live off their savings – meaning that not as many households will not be directly impacted by the rate rise and fluctuations to the property market.
As Melbourne CBD offices reopen, the tree and sea change trend seen in Victoria is expected to slow but not stall completely, as hybrid employment practices allow workers to make a longer commute on fewer days. As an example of this, all one needs to do is take a look at the figures.
In the Loddon shire outside Bendigo, house prices soared 64.2% to a median $332, 500 between March 2021 and March 2022. Prices also rose at least 30% in another eight council areas, including Warrnambool (39.6%), Mansfield (37.4%) and the Surf Coast (up 35.8%). While the peak of the Australian property surge may have passed, regional Australia is far less likely to be as exposed as the inner city suburbs with higher price tags.
For those concerned about how rising interest rates will influence the property market, it’s also worth keeping an eye on what the new Labor government will do to combat inflation and the rising cost of living. Although Prime Minister Anthony Albanese can do little to stop the RBA from making necessary cash rate changes, new initiatives such as the Regional First Home Buyer Support Scheme and even the shared equity Help To Buy scheme may yet have a part to play in influencing property prices.
Should you be looking to sell your home or purchase a new one, enlisting the services of a free property advisor like ESPA can often be a game changer. As an example, your advisor would likely research the property, local agents, check the zoning, evaluate market conditions, and communicate clearly with you regarding all of your options – but where do you find one?
Take The Stress Out Of Selling Property
As a completely free service, Emergency Services Property Advisors provide property advisor services to Police, Fire, Ambulance and S.E.S personnel and their families right across Victoria.
Luke and the team at ESPA are passionate about providing support to some of Australia’s most valued public servants. Along with key industry insights, ESPA also works with a broad range of service providers linked to the real estate industry such as conveyancers, trades, legal practitioners and mortgage brokers.
If you are an emergency services worker looking to potentially buy or sell property in the future, please get in touch with Emergency Services Property Advisors today to discuss how we can turn your real estate dreams into reality, or call Luke directly on 0414 757 705.