The days of ultra low interest rates are well and truly over and we are likely to see rate rises for the remainder of the year.
Rate rises won’t fix block supply chains, a shortage of workers or the war in Ukraine but it will ideally slow the economy down enough to stop runaway price growth.
While rate rises are occurring, will we see house prices take a tumble? At this stage, it is looking more like a calming of prices, as opposed to a free fall. Depending on who you ask, what methodology you use to calculate prices, and what time frame you are looking at, prices have either fallen or growth has slowed. We are certainly in a new cycle but there are a number of reasons why prices aren’t likely to drop dramatically.
1. Construction costs are up
It is getting more expensive to build a home. This will push some people into established housing (if building becomes too expensive for them) and will lead to a shortage of housing (projects will be put on hold). Fewer new homes and more people wanting existing homes will mean that prices won’t fall as much as they otherwise would
2. Rents are rising rapidly
Investor activity remains strong, not because capital growth is continuing to accelerate but likely because rental demand is strong. Similarly, being a renter right now isn’t that great – it is hard to find a rental property and it is getting more expensive. More investors, and renters switching to buyers, will also mean prices won’t fall like they otherwise would
3. Population growth will be stronger this year
Australia has lost more people overseas than gained through the pandemic. Now that borders have reopened, we will see population growth start to get back to more normal levels. With increased population growth comes increased housing demand. This will also keep prices elevated.
4. First home buyer incentives are being introduced
The new Labor Government plans to bring in a shared equity scheme for lower income earners. While this is good news as it will encourage home ownership for people who otherwise would find it difficult to get into the market, a similar scheme introduced in the UK led to prices rising by an estimated six per cent.
5. Economic growth is strong
Interest rates are rising but unemployment remains low and economic growth is strong. If consumers remain confident about the outlook, then this will also prevent a significant drawback in housing demand from both owner occupiers and investors.
6. Not all markets are highly sensitive to interest rate rises
Sydney and Melbourne house prices are highly correlated to interest rates primarily because they are so expensive. It is therefore not surprising that both these cities have slowed the most dramatically. Elsewhere prices are remaining far more elevated despite rising rates.