It’s no surprise that property prices take a hit when interest rates go up, because Aussies need to calculate how much more their mortgage repayments will be. But the impact of rising interest rates may be more than we bargained for.
New analysis from Domain has found when mortgage rates rise by 1 per cent, it will impact national home values by 1.34 per cent. That effect is significantly more visible in higher-value property markets, such as Brisbane and Sydney, where a 1 per cent increase in mortgage rates resulted in house prices dropping by 2.45 per cent and 1.96 per cent, respectively.
As both cities' property markets were relatively higher-value, a small change in the mortgage rate resulted in large changes to repayments and, therefore, affordability, the Domain report found.
Despite being a higher-value housing market, Melbourne was the anomaly, with the effect of changing mortgage rates being almost half that of Sydney (down 0.89 per cent).
Domain said the underlying cause may be that Melbourne experienced the most rapid population growth rate historically and was set to become Australia’s largest city (population-wise) by 2031-32.
The rapid population growth means there is still a high demand for property, despite rising interest rates.
“Mortgage rates should play a role in determining the home loan amount you are willing to borrow, especially concerning serviceability buffers. But our analysis shows that mortgage rates aren’t as important for house prices in the long term,” Domain chief of research and economics Dr Nicola Powell said.
“It’s important to remember that multiple factors influence the market, from house-price fluctuations and population patterns to income growth, tax regimes and even lifestyle preferences.”
Powell said while property prices had been falling, they still remained much higher than pre-pandemic.
“The property market is cyclical, and my advice, for now, is to tighten the purse strings and hold on while we all ride out the uncertainty of this price cycle,” she said.
“Our analysis is based on past data, so while we can assume that future house price fluctuations because of mortgage rate changes will be similar to our estimates, there are a lot of other factors to consider.
“Let’s keep our eyes on population growth as overseas migration has made a sharp positive turn and will continue to be a hot topic into 2024.”