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When interest rates rise in Australia, it will affect the market, but it is unlikely any rise will result in an immediate reduction in property value. Many experts predict that while prices will drop, there will be a significant lag in reducing property value as borrowers enter the market.


At CoreLogic (a property data firm), they analysed Australian property valuations and interest rate increases. They found you can expect a gap of around twelve months before investors see a noticeable downward pressure on property prices.


In May 2022, the Reserve Bank of Australia (RBA) lifted the official cash rate for the first time in eleven years. The last time the cash rate was lifted, Australia had only just removed John Howard as Prime Minister in 2007. Since then, the cash interest rate has steadily declined, and property values have increased significantly.


While it is hard to determine if another increase from the RBA is on the horizon, paying close attention to what is happening can inform you if it is an excellent time to buy or sell a property. It is likely the RBA will wait and see the effect of this recent increase before deciding if another raise is suitable.


How do cash rate rises affect property prices?

Any price change expected due to a rise in the cash rate is often slow to hit the market. However, many experts consider that as there has been a significant gap since the last increase, this rise could swiftly affect property prices.


When you look through historical data, changes to the cash rate have taken many months to affect property prices. For example, if you look at the data from 2009, you’ll find prices took around nine months to drop. This time is different because property prices are substantially higher than during past events. The debt-to-income ratio is very wide, and this tends to make the property market more sensitive to changes in official interest rates.


Many experts believe that the cash rate will climb to 2 per cent before the end of 2022 and then move towards 2.5 per cent by the end of June 2023. This rate increase can result in potential buyers not borrowing as much as they’d like to purchase the property. Also, with housing affordability set to worsen, house prices would likely drop by 10 – 15 per cent all over Australia. As Melbourne and Sydney are the largest markets, these areas will likely see values dropping at the higher end of the scale.


If you look at auction clearance rates, you’ll find they are already softening compared to previous rates. Property prices are already dropping in some areas, which is likely due to buyer fatigue, higher fixed interest rates, property affordability, and the general concern over further interest rate increases. When interest rates increase further, it will only add fuel to the fire, and property prices may drop.


Will interest rate increases affect auctions?

When interest rates increase, the fear of missing out (FOMO) shifts from buyers to sellers. This means that sellers are more motivated to sell, and they may be more willing to accept a lower offer for their property. Currently, auction rates are expected to stabilise until the end of the year and then show a reduction of about 8 per cent in the first half of 2023. If the official interest rate is further increased, this drop could be higher.


One of the problems with interest rate rises is that it lowers buyers borrowing and spending ability. Not only are buyers being offered less from financial lenders, but they are often less willing to spend the entire amount they are offered. In a situation where the interest rates may increase, some buyers will aim to protect themselves and decide to borrow less. This reduced borrowing can provide a buffer and protect them if interest rates increase further.


As there is less purchasing power available, sellers may not get the price they are aiming for and will accept a lower offer. Increases in interest rates can also push some buyers out of the market, as they may prefer to wait it out and see if they can get a better rate in the future.


In Sydney and Melbourne, the suggestion of a potential interest rate hike early in the year had already seen a stalling of auction clearance rates. Some investors suggest that the downturn in property values started in late 2021 and has continued into 2022. This price reduction could be due to how buyers are unwilling to meet the sellers’ expectations and are offering less or simply walking away from the sale.


Investors and market experts are saying the market dynamics have shifted. Currently, there are fewer buyers available, and people are only moving if they have a legitimate reason to do so, such as upsizing or downsizing. Buyers are also more cautious and are less willing to overextend themselves for nothing more than a better backyard. Buyers are altering what they consider the value of the property; what would increase the value of a property in the past is now considered primarily irrelevant.


Buyers are increasingly concerned about high property values and are not purchasing at past levels. Some experts believe the property market will only be affected after multiple interest rate increases, but this is often challenging to determine. Keeping a close watch on the market is one of the best ways to tell if property values are set to decrease.


Property values in Australia

In the first quarter of 2022, all Australian capital cities (except Canberra) have seen a drop in property values. With the recent cash rate increases, it is predicted that it’ll take a year to see the full effect of any downward pressure on house prices.


Currently, housing values are growing at their fastest rates since 1989, and the rate rises are aimed at slowing down these rates. If interest rates are increased multiple times in 2022, it could severely impact a buyer’s borrowing capacity. For example, a person earning over $100,000 a year could expect to see their borrowing limits reduced by around $30,000, and for those earning over $150,000, it’s drop by over $45,000.


The RBA is always a little cagey about if they are planning a rate increase or any that are planned in the future. When interest rate increases are on borrowers’ minds, they could choose to borrow less on their own accord. This means that it is possible that even the idea of an interest rate increase could start to affect the selling prices of homes.


For investors concerned about property prices, or interest rate rises, it is best to seek advice from a professional team. At Vendor Advocate Melbourne, we can provide excellent advice on the property market is doing in your area. Our expert team can provide you with the best information available and find the perfect property for you.

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