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  • Writer's pictureGM Homes

Why Property Prices Continue to Rise

While some bank economists are predicting that house prices will fall this year or in 2023 as interest rates increase, I’d like to explain why property prices will continue to rise.

Economists are concerned that the Reserve Bank will soon raise interest rates to slow down inflation because inflation is very hard to reign in once it takes hold.

They believe that higher interest rates will make housing less affordable, and that lower buyer demand will then push prices down.

It seems to make sense that higher borrowing costs will reduce buyer demand and therefore prices will fall.

But, it’s hard to test this theory, because interest rates have gradually declined since 1990 when the standard variable home loan rate was an eye-watering 13.5%.

For over 30 years property prices have grown and interest rates have fallen

There certainly is a strong correlation between falling interest rates and rising property prices, but does this mean that the reverse is also true?

How can we be sure that if interest rates rise, property prices will fall?

In the last 30 years, property prices did not fall when interest rates rose.

The major banks have lifted their standard variable home loan rates several times since 1990 and the last rises in the official cash rate ended over a decade ago in 2011.

It is possible, of course, that property prices might have increased more quickly if interest rates hadn’t gone up when they did, but the point is that they did not fall.

The simple reason for this apparent contradiction is that most of our property owners are immune from or resilient to the impact of interest rate rises.

Most of our property owners are immune from interest rate hikes

One-third of our housing is fully owned, with mortgages having been paid off and there’s no remaining debt.

The owners are mostly older couples living in empty nests and when they sell, it will be to downsize.

This means that interest rate rises are of no concern to them.

Another third of our housing stock is owned by investors who can claim the cost of housing finance interest against all their other income.

This means that interest rate rises reduce the amount of income tax they pay.

In addition, they can also raise asking rents on their properties to recoup the cost of any interest rate rises.

Only one-third of our residential properties have mortgages that are being paid off by owner-occupiers.

Most of them, however, purchased their homes many years ago when rates were much higher than they are now.

Their financial situations have improved since then and they have probably paid down some of their debt, so a rise in interest rates is quite manageable and does not motivate or force them to sell their homes.

Only first home buyers are badly impacted when interest rates rise

Higher interest rates impact the purchasing power of potential first home buyers more than other property buyers because they need to borrow most of the purchase price.

Some highly leveraged recent first-time buyers in new outer suburban first home buyer areas may experience mortgage stress when interest rates go up.

If enough of them are forced to sell for personal, family, financial, or employment reasons and the number of potential first home buyers also falls, there is a risk that property values in first home buyer locations may fall.

First home buyers only comprise around one-tenth of all homeowners, and despite the personal and social impact of such events when they have occurred in the past, local markets have always bounced back into growth within a few months.

Yet there have been several times in the past when our housing market as a whole has fallen in value and this suggests that there must be another cause.

Housing prices fall when the amount of housing finance is restricted

The only times when housing prices went backwards were during the First World War, the Great Depression, the Sixties Credit Squeeze, the Recession “We had to have”, the Global Financial Crisis and most recently, as a result of APRA restrictions on the amount of housing finance that investors could obtain from the banks.

Each of these events was a recessionary crisis that severely cut the amount of housing finance that was available to property buyers.

Unlike interest rate rises, which may impact only around ten percent of property owners, a lack of housing finance affects all potential first home buyers, upgraders, and investors, who together make up two-thirds of our housing market.

This is why house prices don’t fall when interest rates rise, but when there’s not enough housing finance available to potential buyers.

The aim of interest rate rises is to curb inflation, not hit housing prices Interest rate hikes are a broad brush tool that the Reserve Bank uses to slow down inflation.

Because rising interest rates only impact a small percentage of homeowners, we should look at the reason that they are increased, which is to slow down the rate of inflation. Is there a link between rising inflation and housing prices?

Housing prices have always moved in sync with the rate of inflation

This graph shows the relationship between capital city house prices and inflation from 1901 to the present time and demonstrates that housing price movements and inflation have always been in sync with each other.

In summary, it is clear that interest rate rises only impact a small percentage of property owners, while property prices on the whole rise whenever the rate of inflation increases. If inflation goes up this year or next, so will property prices.

Make the right decision for you and your future. Contact us today to speak to a professional about your asset purchase, or other guidance we may be able to assist with. 1800 097 522


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