How high interest rates nipped a housing market ‘supernova’ in the bud

Australia’s housing affordability crisis is accelerating, experts say, but would be worse if the Reserve Bank hadn’t begun raising the cash rate in 2022.

Huge cuts to borrowing power caused by the steepest rate hiking cycle in 30 years have made affordability worse, particularly for buyers without access to the bank of mum and dad, but this had less of an effect than if house prices had continued to rise following the post-COVID housing boom.

Housing affordability has declined 15 per cent over the five years to March, Real Estate Institute of Australia figures featured in the PRD Australian Economic and Property Report released on Friday show. The affordability measure is an index derived from home loan and house price data and was weighted to account for COVID-era market instability.

But over the 10 years to March, affordability fell by a smaller 13.4 per cent. PRD chief economist Dr Diaswati Mardiasmo said this indicated the crisis is worsening.

“It’s definitely accelerating in terms of unaffordability,” she said. “If you compare 10 years ago, 2014 to 2024, you’ve ridden out a lot of things. In the past five years that’s COVID. It’s a supernova event that pushed unaffordability.

“I would say that 13.4 per cent is quite reasonable over 10 years, because that’s 1.3 per cent per year.”

Mardiasmo said house prices would have exploded further if it hadn’t been for the RBA rate hikes.

“It isn’t as bad as it could be if we hadn’t had the cash rate hikes. If we kept on going after COVID … it would be worse than 15 per cent, it would be 20 per cent, or nearly 25 per cent,” she said.

“At the moment, Australia as a whole country, we’re at a median house price of $1 million. If we hadn’t had the cash rate hikes we’d easily be at $1.3 million or $1.4 million by now.”

Quantify Strategic Insights head of data and insights Angie Zigomanis said interest rates were at rock-bottom during the COVID boom, which encouraged buyers to load up on cheap debt to buy properties even as prices skyrocketed.

“That makes a big difference to your mortgage repayments,” he said. “It probably gave people a bit more confidence to leverage themselves up a bit further.”

AMP chief economist Shane Oliver said there’s no doubt a runaway market would have made homes even more unaffordable.

“I think the situation would be a lot worse,” he said. “There’s no doubt it’s been worsening over time … People would have been able to borrow more which pushes prices even higher.”

Zigomanis said it was likely prices would have been higher without the 2022-2023 rate hikes; if rates stayed low, more Australians would have kept their jobs, which would have supported prices.

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Oliver said the supply and demand for homes had been off-balance for nearly 20 years, which had amplified other issues affecting the property market.

“For much of that period we haven’t supplied many homes in balance with the population,” he said. “Usually, we’d build enough houses to match the growth in the population.

“In about 2005, with the mining boom, we saw a surge in population growth that wasn’t matched by construction. It has been getting a lot worse over time and with the absence of a decent supply response it will continue to deteriorate.”

Oliver said efforts by governments to add more stock to the market through the housing accord ironically had been hampered by the high interest rates, an economic headwind that weighs heavily on the construction industry.

“It’s a pretty bleak situation,” he said. “High rates do invariably have a negative impact on home building. Lower interest rates would help in the short term, but that’s about it.

“It won’t solve the fundamental problem, which is that we need to find a way to build 240,000 homes a year.”

REIA president Leanne Pilkington agreed. “We need more supply. Until we get more supply in the market, prices won’t come down.”

Mardiasmo said that because house prices were continuing to rise, it indicated that Australians were putting more of their income towards purchasing property and servicing loans. Buyers had become more skittish than usual, however.

“We are definitely seeing buyers that are more cautious,” she said. “People know that prices are higher, interest rates are higher … days on market have increased and clearance rates are not that great.”