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Property prices could fall 15% if rates keep rising

The RBA governor Philip Lowe speaking at the National Press Club in Sydney and the aerial view of property in Australia.
Property prices are already starting to slow as the RBA hikes interest rates. (Source: Getty)

The growth in Australian capital city property prices is slowing at the fastest pace in more than 30 years.

PropTrack analysis of home price growth in Australia has found prices in the country’s capital cities have slowed down at the fastest pace since 1989.

This follows the exceptional price growth experienced during the pandemic - when prices rose at the third-fastest rate in Australia’s history.

The Reserve Bank of Australia (RBA) warned that rising rates could lead to property prices dropping as much as 15 per cent in two years.

In its Financial Stability Review, the RBA said both banks and borrowers needed to consider the potential for a drastic drop in property prices.

“After nationwide housing prices increased by 22 per cent over 2021, the pace of housing price growth moderated in most markets in early 2022,” the review said.

“Future increases in interest rates could also weigh on housing and other asset prices.”

The RBA compared the historical relationship between interest rate rises and both supply and demand factors, and estimated a major fall in property prices could be on the horizon.

“A 200-basis-point increase in interest rates from current levels would lower real housing prices by around 15 per cent over a two-year period,” the bank said.

Property prices still rising - but slower

The Proptrack report found the annual rate of home price growth in Australian capital cities had slowed from a rapid 24 per cent six months ago to 14 per cent now.

The slowdown is faster than those experienced in 2004 and during the Global Financial Crisis in 2008.

In Sydney, price growth has also slowed at the fastest pace since 1989, with Melbourne seeing the quickest slowdown since 2010 and Brisbane since 2008.

Hobart price growth has fallen the quickest of any period since 1986.

Adelaide and Perth have not experienced anywhere near the same reduction in growth this year.

Despite the slowdown, prices are still up 35 per cent nationwide since the start of the pandemic.

“Home price growth has slowed down quickly in 2022,” PropTrack economist and report author Paul Ryan said.

“Perhaps this is not surprising, 2021 was the third-fastest period of home price growth in Australia’s history.

“Regardless of the slowing across the board, it’s important to remember that price growth was

unprecedented throughout the pandemic.”

Impact of rate rises on property prices

Ryan said interest rate rises were one of the main factors driving the slowdown.

“Buyers have been more cautious in 2022. A two-percentage-point increase in interest rates would increase average mortgage repayments by almost 25 per cent,” Ryan said.

“Buyers will also be hesitant to bid as aggressively as we saw last year, since there is much uncertainty about how high mortgage repayments will be before the end of this year.”

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