[19/05/2022]
It’s been the talk of the country for the past two weeks. On the 3rd of May, the Reserve Bank of Australia (RBA) raised interest rates for the first time since 2010.
The Australian Prudential Regulation Authority (APRA) reported that 300,000 mortgage borrowers are at serious risk of default, while mortgage borrowing sizes are estimated to decline by about 10%. 1
But does this mean that property prices will drop? Probably – but not as much as you might think. Economist Paul Ryan believes that housing prices may reduce by about 15% over a 2-year period. Though this is a substantial decline, the drop isn’t as dramatic when you stack it alongside some other numbers. 2
Firstly, if inflation stays at 5% over the next two years – which it likely will – price levels will only be 10% lower than current levels. 3
Now let’s stack that next to the price increases seen during the pandemic. Since March 2020, national home prices have exploded across the country – by much more than 10%. Presently, a 10% decrease in house prices would only put prices back to mid-2021 levels. 4
Chief Economist of the HIA Tim Reardon also points out that ongoing material shortages, low supplies of skilled labour and diminished global supply chains – all major contributors to new home demand – will be unaffected by increasing interest rates.
Reardon says that “concerns that this rate rise could lead to…extraordinary declines in home prices are unwarranted.” 5
However, there is uncertainty around how much the RBA will raise interest rates and what effect the upcoming federal election will have on wage growth – both factors that can influence future house prices. 6
Sources
1. Nassim Khadem "With Interest Rates About to Start Rising, Experts Estimate Almost 300,000 Mortgage Borrowers Are At Serious Risk Of Default." ABC News Australia, Published 2nd May 2022.
2, 3 & 4. Paul Ryan "What will rising interest rates mean for property prices?" realestate.com.au, Published 4th May 2022.
5 & 6. Tim Reardon "Rising rates do not solve material shortages" HIA, Published 3rd May 2022.