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Nest Realty News

Rising Interest Rates, the RBA, and the Effect on Property Prices

The Reserve Bank of Australia (RBA) recently raised interest rates, and over a million home borrowers are seeing their first increase in mortgage rates ever. While the hike in interest rates comes as no surprise to many, the RBA’s promise that this is just the first of several increases is a point of concern.

In a recent statement, RBA governor Phillip Lowe explained that the board felt it was time to pull back on the financial support put in place to help the economy in the earlier days of the pandemic. Lowe points to an unemployment rate of 4 per cent and an economic growth rate of 4 per cent as proof the country does not need to be propped up financially. Along with these positive signs, he sees evidence that wages are also rising.

Lowe believes that rising interest rates are a positive indicator of Australia’s strong economy. He foresees more rate hikes but says the board is moving ahead, being guided by data and not a preconceived path.

Lowe said, “It is not unreasonable to expect that the normalisation of interest rates over the period ahead could see interest rates rise to 2.5%, that would be a more normal level of interest rates, and how fast we get there and whether we get there is going to be determined by events.”

How Will the Housing Prices Respond?

Before the increased interest rate, reports that housing prices were levelling off came from various parts of Australia. Some economic experts credited this to jitters ahead of the expected RBA rate increase. Others believe that the massive rise in housing prices was unsustainable and that falling home prices were inevitable.

In Perth, the interest rate hike stalled price growth that was only marginal in May. Throughout the months of unparalleled growth across the nation, housing prices in Perth grew substantially but at a slightly more controlled rate. Now Perth and its suburbs are looking at the first price decreases amid the shifting conditions.

The news of future interest rate increases predicts the cash rate will be around 2.5 per cent by the end of the year. This kind of news will push down housing prices, even though many banks conservatively project that the end of the year rate will be between 1 and 1.5 per cent.

Consumers can expect a reduction in borrowing capacity as well. If percentage points for mortgages increase by one point, there will likely be a 10 per cent tightening of maximum borrowing amounts. However, if rates rise by two points, the maximum amount for borrowing will shrink by 19 per cent.

The Perth house prices will depend a great deal on whether the points go up by one or two points. While no one can say with absolute certainty whether the number of points will go up by a single point or by two, many in the housing world are holding their breath to see how the situation resolves itself.

While the seemingly inevitable decline in house prices in Perth may not thrill many property owners in Perth, news on the investment front is better than many expected.

A Perth property advisor group conducted a nationwide survey and found encouraging news for the Western Australia capital. An impressive 40 per cent of active investors planning on making investments in the next year feel that Perth is
their most promising location. Perth is likely to enjoy increased favour with investors and homebuyers with dipping prices. Even as areas like Melbourne and Sydney see declines in investor confidence, Perth is rising as a top option within investment circles.

A large part of the appeal is that Perth provides considerable value for the money. The Western Australian city requires the least amount of money to service a home loan. In the December quarter of 2021, a household in WA needed 26.2 per cent of its income to service its home loan. This is in contrast to the 37.3 per cent of income necessary in Victoria and the 46.7 per cent of income needed to service a home loan in New South Wales.

The market changes that are creating lower home prices in Perth are an unfortunate turn of events for those hoping to sell their property now. However, the same changes provide a considerable opportunity not only for investors but additionally for potential home buyers interested in the Perth area.

No matter where you are in your real estate journey, you can count on the professionals at Nest Realty for the guidance you need to work through the changing housing market. Whether you are buying, selling, or getting into renting property, our experts understand the fluctuations that come with changing rates, and they can help you make the best decisions for your future security.

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