Interest rates have been on an upward climb over the past year, as central banks attempt to curb high inflation. The sharp rise in rates is impacting real estate markets across Australia. Here’s an in-depth look at how increasing mortgage rates could affect property values.
Higher Mortgage Rates Reduce Home Affordability
As interest rates increase, the cost of borrowing and servicing a mortgage goes up. Monthly mortgage payments on new loans will be significantly higher than over the last decade of ultra-low rates.
This reduces overall home affordability, pricing some buyers out of the market entirely. First home buyers are especially impacted. Even current homeowners may struggle to upgrade or take out equity.
Declining affordability leads to decreased demand, which will likely cause a moderation in the rapid home price appreciation seen during the pandemic.
Sales Volumes Should Trend Lower
Higher mortgage rates don’t just affect prices – they also influence sales activity. As rates rise, fewer buyers can qualify for loans. Banks are also less willing to lend at higher debt-to-income ratios.
This shrinks the pool of eligible and active home shoppers. Sellers may have to wait longer to find a buyer even if they price competitively.
Expect property sales volumes to trend downward over the coming year as rising rates reduce demand. Total inventory levels could also increase as homes stay on the market longer.
Pressure on Investors and Speculators
Many real estate investors and flippers rely on cheap debt and low rates to make profitable deals. As the cost of capital increases, investors will face narrower profit margins.
This will likely cause a pullback in speculative buying and reduce competition for regular home shoppers from investors.
Regional Markets to Decouple from Capital Cities
Expensive capital city markets should see a larger impact from rising mortgage rates compared to many affordable regional areas. This could cause property values to decouple between capitals and regional markets.
Regions with solid local economies and in-migration may hold up strongly. In comparison, overheated capitals could see sharper price corrections as rates rise.
Long-Term Healthy for Market Stability
While rising interest rates may lead to a housing slowdown, many believe this will promote stability and sustainability over the long-term.
Preventing overinflated home values and excessive speculation now can help avoid a painful crash later. Slower price growth may also aid housing affordability challenges.
Overall, rising rates look set to cool Australia’s heated property markets in 2023 and beyond. But a subtle rebalancing and increased affordability could be positive in the long run.
