Will a cash rate hike cause a sharp drop in house prices?

By Gerv Tacadena

A rate hike increase will not necessarily cause prices to drop.

The growth in house prices is starting to slow but the likely rate hike would not cause it to totally crash down as many believe, according to the Property Investment Professionals of Australia (PIPA).

PIPA's recent analysis of five rate-hike periods since 1994 showed that house prices continued to trend upwards even after substantial increases to the cash rate.

For instance, house prices actually went up by 35.7% over the period covering March 2002 to December 2003.

During the same period, four 25bps increases happened, pushing the interest rate to 5.25% by the end of 2003.

The cash rate remained stagnant until another 25bps increase happened in March 2005.

Bigger factors at play

PIPA Chairperson Peter Koulizos said other factors have a more significant impact on the housing market's strength.

“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," he said.

Mr Koulizos said the current booming market conditions are brought about by an easier access to credit, which was 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," he said.

Mr Koulizos said local economic conditions, consumer sentiment, and affordability are also more dominant factors at play that could dictate where prices go.

Alarmist claims surface

Mr Koulizos said recent developments concerning interest rates have been used to scare homebuyers and borrowers about a potential price correction and stringent accessibility to mortgages.

The Reserve Bank of Australia maintained the cash rate at 0.1% in its recent monetary policy meeting this month.

While the central bank does not see any possibility for a cash rate until inflation and unemployment numbers are at ideal position, it did change its forecast about when these targets would be met.

The RBA is now expecting these economic factors to meet its target by 2023, a year earlier than the previous prediction.

Mr Koulizos said borrowers should not be worried about the rise of interest rates having an immediate impact on the affordability of mortgages.

“The latest ABS Lending Indicators showed that the national average loan size for owner-occupier dwellings was $574,000 in September, which shows that the vast majority of people are not racking up massive singular mortgages of $1m or more,” he said.

Mr Koulizos said that new loans have already been stress-tested against higher interest rates, and a gradual increase in rate hikes would not hurt as much as alarmist forecasts claim.

“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 a $574,000 loan may increase by about $73 per week if the interest rate increased one percentage point. Or from 3% to 4%,” he said.

Photo by Tobias Mrzyk on Unsplash

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