Here’s what higher rates will mean to the housing market


key takeaways

Key takeaways

For the first time in 11 years, the RBA increased rates and “the market” is expecting them to increase sharply over the rest of 2022.

Major bank forecasts are more conservative – they don’t believe rates will rise as fast as that.

There are many factors underpinning the strength of our property markets.

The long term trend in property values has been upward and this will continue in the future underpinned by our population growth and the wealth of our nation.

For the first time in 11 years, the RBA increased rates and we’re still expecting them to increase sharply over the rest of 2022.

We already know that there’s a slowdown in-home price growth in part due to affordability issues, concerns with overseas geopolitical tensions, an upcoming election, and rising inflation, but no doubt exacerbated by buyer expectations of rate rises.

So, what could rising interest rates mean for property prices?

Paul Ryan, an economist with REA Group’s Proptrack recently gave his views.


Disagreement on how fast the rates would rise

Obviously, a lot will depend on how many interest rate rises will occur and how fast rates will rise.

Clearly, no one knows, but the pricing in the futures market implies that the cash rate will be above 2.5% at the end of this year.

Obviously, this means that the cash rate will increase by more than 2.2 percentage points in the next 7 months.

On the other hand, major bank forecasts are more conservative – they don’t believe rates will rise as fast as that.

They put the cash rate somewhere between 1% and 1.5% by the end of 2022:


Paul Ryan, an economist from REA commented:

“If mortgage rates increase by the same amount (as the money market forecasts) – and it is entirely possible they increase by more than that as lenders look to repair their net interest margins – that would double the average rate on new loans from the current 2.5% to 5%.”

Of course, that is a very steep increase.

The fact is it would quickly take mortgage rates back to levels we have not seen since 2013.


Interestingly, a one percentage point increase in mortgage rates will increase total repayments by around 12%.

This is despite the interest rate going up by 40%.

Mr. Ryan further explains:

“This is due to the feature of fixed-repayment mortgages in Australia, where when interest rates increase principal repayments fall for newer mortgages, offsetting the increase in interest payments.

This feature is a key reason why savings, in the form of principal payments, boomed following the reduction in interest rates at the start of the pandemic.

This increase in savings will mechanically reverse and buffer mortgagors from repayment shocks.”

Obviously borrowing capacity will also reduce.

Ryan explains that maximum borrowing capacity will go down by around 10% if interest rates rise by one percentage point and if rates rise by two percentage points or higher it’s possible borrowing capacity would be reduced by 19%.

Of course, this decrease in loan size could significant implications for the housing markets.

A 10% fall in home prices will only take back prices to 2021 levels

Remember we have just experienced a once in a generation property boom where the value of most properties around Australia increased by 20% and in many cases 30%, so a fall of 10% in home prices will really only take values back to where they were a year or so ago.


According to RBA’s recent Financial Stability Review, a two-percentage-point increase in mortgage rates would reduce “real” housing prices over a two-year period.

Ryan explains that it is important to realize that the ‘real’ part is important.

This means that if inflation is cumulatively 5% over the next two years, price levels will significantly only be 10% lower than the current level.

Mr. Ryan further explains:

“While a sizeable drop, it would only retrace a small amount of the recent extraordinary gains we have seen across the country.

A 10% nominal drop would put national prices where they were in the middle of last year.

All capital city prices would only retrace to prices seen some time last year.”

Prices rose when rates last increased

Though interest rates clearly matter for housing, they are not the only driver.

While the RBA’s estimate isolates the effect of interest rates on prices, other things also matter.

Indeed, the RBA increases interest rates when the economy and factors like wage growth are performing strongly.

To which, Mr. Ryan said:

“These other factors boost housing prices. The last two times interest rates were increased, home prices also increased.

From 2002 to 2008, prices were up more than 30% despite the cash rate increasing three percentage points.

This is a good comparison with the current period, both because interest rates increased quickly and because it was a period of strong wage growth, which we expect to see this time.

From 2009 to 2011, home prices were up 11% at their peak and were up 6.6% at the end of the tightening phase which pushed up rates by 1.75 percentage points.”


What’s the difference this time?

Ryan explains that this time, it is different for two reasons.

“Firstly, we have just seen national home prices rise by 35% since the start of the pandemic.

Obviously, even without interest rate increases, this rate growth could not continue.

Secondly, price growth already slowed markedly across the country.

In fact, many buyers and sellers take signals from the recent market performance that the growth has slowed so much.

This suggests that prices will remain weak.

However, much can still change in terms of both how steeply the interest rates increase and how fast wage growth will be.

Both remain uncertain as of this point.”



Of course, there are many other factors that will be underpin and minimise property price slumps.

I know there are many property pessimists out there telling us that house prices will drop 10%, 15% and now even up to 25% based on the argument that rising interest rates will create mortgage stress.

And if you haven’t heard, there’s another cliff we need to worry about – the stress that will be experienced over the next couple of years when those who have fixed rate mortgages revert to variable rates that will be higher than they are used to.

Of course we didn’t fall off any of the other cliffs that the Negative Nellies will work worried about and if you think about it, there are many factors that will underpin housing values and minimise property price falls…Some Borrowers At A Cliff Edge As Their Loans Roll Over

These include:

  • We have a strong economy and historically low unemployment rates
  • Rising wages make it easier for households to cope with higher mortgage costs
  • The average Australian is wealthier than ever – CBA economists estimate that during lockdowns households have socked away some $230 billion in excess savings, leading to a massive war chest of cash and deposits.
  • Even when rates rise they will still be low and only get to where they were a few years ago.
  • The fact that 50% of homeowners do not have a mortgage against their home and will not be affected by rising interest rates
  • The significant number of mortgage holders who are many months and sometimes years ahead in their mortgage repayments while others have significant puffers in the offset accounts
  • We are in the midst of a rental crisis and rising rents will help investors cope with higher mortgage costs.
  • The current shortage of properties and the fact that there are fewer properties in the construction pipeline at a time when our borders are reopening and demand will increase.

We are just working away through the next stage of the property cycle, and values don’t keep rising in a straight line, but over the last hundred years while there have been short term downturns, the long term trend in property values has been upward and this will continue in the future underpinned by our population growth and the wealth of our nation.

Kate Forbes is a National Director Property Strategy at Metropole. She has 15 years of investment experience in financial markets in two continents, is qualified in multiple disciplines and is also a chartered financial analyst (CFA).
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