Why future interest rate rises won’t spell doom and gloom

According to a PIPA review of five periods of increasing cash rate movements since 1994, house prices have always continued to grow – even in the instance where rate hikes of 2.75 percentage points occurred over a period of just six months.

Cash Rate Rises and House Price Movements

Sources: RBA and ABS Residential Property Price Index

While the strength or weakness of property does play a role, PIPA chairman Peter Koulizos stated that markets were instead frequently influenced by local economic conditions, particularly affordability concerns.

It’s a similar trend to what’s playing out now.

“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 per cent before the pandemic hit,” Mr Koulizos said.

He pointed at a pessimist outlook being circulated that if interest rates rise, home prices will immediately begin to decrease dramatically, which he said appears to be an attempt to scare people.

To debunk this myth, Mr Koulizos cited data from the Australian Bureau of Statistics (ABS): “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 $1 million or more.

“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 per cent to 4 per cent.” 

The PIPA chairman has given an important reminder that new loans are already stress-tested against significantly higher interest rates, around 5.65 per cent, and so, alarmist “forecasts” that aren’t backed up by evidence are pointless.

What, then, is causing house prices to shoot up at the present time?

“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,” Mr Koulizos opined.

The bottom line is that lending accessibility has a big role to play in the status of the property market, according to the chairman.

“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.”