Are rising interest rates pushing down property prices, or is there more to it?

Australia’s median house price has fallen for the first time in two years, according to the latest Domain House Price Report, but recent interest rate hikes are only part of the reason why.

In fact, the downturn in Sydney’s housing market — which has seen a 2.7 per cent decline in house prices over the June quarter and driven down the national median house price — had begun well before the first cash rate hike in May, said Domain chief of research and economics Dr Nicola Powell.

“The slowdown in Sydney’s housing market was occurring before the recent interest rate hikes, as prices moved through the peak rate of quarterly growth in mid-2021 and annually by late 2021,” she said.

While the initial triggers for the downturn were increasingly unaffordable housing and higher levels of supply as motivated sellers timed the market to take advantage of peaking prices, rate hikes and changing consumer sentiment are now starting to have a major effect.

“Currently, the total advertised supply is sitting 13 per cent higher than last year and 7 per cent above the five-year June average – shifting the balance of power to buyers,” Powell said.

Although prices fell in Sydney and Melbourne, all other capitals posted gains last quarter, with Adelaide house prices up 3.6 per cent, Canberra up 1.4 per cent, and units outperforming houses in most cities.

Interest-rate movements may seem to have a significant affect on the property market, but rate hikes only make up about a third of the equation, said PRD Real Estate chief economist Dr Diaswati Mardiasmo. 

“This is because interest rates impact the demand side more than the supply side of price movements,” she said. 

What other factors influence property price changes? 

Multiple factors relating to the supply and demand of property in a given area work in tandem to shift property prices, Mardiasmo said. 

“If I look at it as a pie, you take out say 30 per cent for interest rates and another chunk, 30 per cent or 40 per cent, for the supply level that is available in that particular area,” she said. 

“The other 30 per cent are things like the demographics of the area, what the government has introduced or taken away in terms of taxes, schemes or grants, as well as [a buyer’s] financial situation and household income.” 

All these factors work together to inform buyers’ decision-making, which translates to less or more competition in the market, ultimately affecting property prices, Mardiasmo said. 

Consumer sentiment and confidence levels also have a significant role to play in how the property cycle pans out. 

When the property market is strong buyers tend to compete harder for fear of missing out, while if the market is weak buyers tend to hold back, said AMP Capital chief economist Shane Oliver. 

“It plays a huge part, the FOMO concept,” he said. “First-time buyers tend to lead, partly because the cycle is often led by low interest rates or government incentives.” 

However, property FOMO may now be a thing of the past. 

Lower buyer confidence levels, fuelled in part by rising interest rates, are evident at auctions across Sydney, said Home Buyer Academy and Suburb Help co-founder Veronica Morgan 

“Generally speaking, there is more caution among buyers,” she said. “[There are] lower numbers of bidder registrations [and] buyers are hesitant to bid because there is none of the ready social proof that’s typical of a hot market.”

What can buyers do to lift their confidence in the current market?

Navigating a transitional property market can be tricky, but knowing your borrowing power can help you maintain a strong position, said Domain Home Loans chief executive Kareene Koh. 

“We often see customers being overly optimistic or pessimistic in times of uncertainty,” she said. 

“Pre-approval is a great way to validate your assumptions and then work out the right next step for your circumstances.” 

“If you have existing pre-approval that is more than 60 days old, it may also be worth checking that things have not shifted so you are working with the best information possible.” 

Building and maintaining a stable buffer can also help lift buyer confidence, Koh said. 

“This could mean looking at your expected repayments and factoring in further [rate] increases to make sure you’re comfortable with making those repayments,” she said. 

When will we see the full impact of rising rates on property prices? 

While rising rates may have affected buyer confidence, we won’t see the full impact of the most recent rate hikes on property prices for a while yet, Mardiasmo said. 

“Normally, I would say that we would start seeing [an impact] in the next six months or so,” she said. “However, I don’t think we’re done yet; we haven’t finished what we’re doing with interest rates.” 

Historically, property price normalisation hasn’t taken place until the RBA has held the cash rate stable for at least three to four months, according to Mardiasmo. 

This could mean the full impact of rising interest rates on property prices won’t be seen till at least 2023.