Beyond Interest Rates: Factors Affecting Housing Prices

As we have seen, rate rises can affect the property market, but there are other factors that appear to hold longer-term sway over national house prices. 

In a bid to bust inflation, the Reserve Bank of Australia (RBA) has been on a rate rise run that has seen the official cash rate go from a record-low of 0.10% to 3.60% in just 10 months.  

Along the way we have seen property prices across Australia decline.  

As rates rose, Australia saw the largest and swiftest property price drop on record, with a 9.1% fall from April 2022 to February 2023. But a recent study by Domain, which explained 30 years of data, suggests that population and migration growth have greater and more long-lasting effects on property prices. The study shows that a 1% mortgage rate increase may result in Australian house prices falling by 1.34% on average. But in comparison, national house prices could jump by 8.18% with a population increase of only 1%.  

Effects of Rising Mortgage Rates and Population Growth

Mortgage Rate Rise Effects 

When interest rates rise, your borrowing power can dip, and the rise in cost of living can hit the hip pocket. So, under these conditions, fewer people may be willing to buy property. 

With less demand, vendors may need to lower prices to sell homes, and if you are ready to buy you may be able to negotiate a great price.  

But the RBA can’t keep raising the cash rate forever!  

In fact, economists at each of the big 4 banks have forecast that the RBA will announce a peak cash rate of 4.10%.  

CoreLogic stated in their recent three-year post-pandemic market report that once we get a rate hike reprieve, property sale and price volatility may lessen.  

Population and Migration Effects 

When mortgage rate rises do affect property prices other factors appear to have more long-term effects.  

Domain’s findings outlined that property prices are reactive to rate rises within the same quarter, whereas movement in population and migration numbers is cumulative and the effects are longer lasting.  

As migration numbers contribute to rebound following the Covid 19 lockdowns and lockouts, it is likely that we will see an increase in property demands, which could cause prices to rise.  

For example, Domain says Melbourne has “made a quick population recovery” since the Covid 19 lockdowns and is set to be Australia’s most populated city by 2031-2032. Melbourne had an 8.1% property price drop in 2022, while Sydney experienced a bigger reduction of 12.1%. Domain’s study suggests that Melbourne’s population boom, and the resulting increase in housing demand are behind the more moderate price drop. And so, whilst it is worth considering mortgage rates when surveying the property market, other factors like population and migration, which feed directly into supply and demand, are certainly worth considering too.  

If you would like to dig into the modelling further, the Australian Government’s Centre for Population website has a great interactive tool that you can use to check out migration forecasts for each state and territory.  

Get in Touch with Us  

Keeping an eye on the property prices is a great idea if you have got home ownership in your sights. And while you are busy researching the market, we can get cracking on helping you find the right loan for you. We can also help you get financially savvy with tips to boost your borrowing power – that way you will be ready to pounce when the time is right. 

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Email: clientservices@zippyfinancial.com.au