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House prices: why this key figure is more important than mortgage rates

Population growth has a far bigger impact on house prices than mortgage rates, according to a new report from Domain.

Domain has found that when the mortgage rate rises by 1 percentage point over a quarter, it will result in national house prices declining by 1.34 per cent.

They also found that when the population of Australia increases by 1 per cent, it increases long-term cumulative house prices by 8.18 per cent, suggesting that population ultimately has a stronger impact on prices than short-term changes in the cash rate.

Domain Chief of Research and Economics, Dr Nicola Powell said that while changing mortgage rates had short-term implications for the market, they didn’t make a great deal of difference in the longer term.

“Mortgage rates should play a role in determining the home loan amount you are willing to borrow, especially concerning serviceability buffers,” Dr Powell explained.

“But our analysis shows that mortgage rates aren’t as important for house prices in the long term.

“It’s important to remember that multiple factors influence the market from house-price fluctuations and population patterns to income growth, tax regimes and even lifestyle preferences.”

The report found that buyers were likely to consider mortgage repayments alongside a host of other factors, including future capital gains, when making a purchase in the current market.

“Therefore, it seems unlikely that mortgage rate increases alone could tank the property market,” the report stated.

Domain found that interest rates had the strongest sway on house prices in cities with high median values, such as Brisbane and Sydney, where a 1 percentage point increase in mortgage rates resulted in house prices dropping by 2.45 per cent and 1.96 per cent, respectively.

This was because, the higher the value of a mortgage, the more impact a slight change in interest rates would have on repayments.

Melbourne was the exception to this rule, with changing mortgage having a much smaller impact on values (resulting in a decline of 0.89 per cent).

The underlying cause may be that Melbourne has experienced the most rapid population growth rate historically, as well as a fast recovery in population following the Covid pandemic.

Dr Powell warned that the analysis had been conducted using historical data, and that future house prices would be dictated by a range of factors.

“Our analysis is based on past data, so while we can assume that future house price fluctuations because of mortgage rate changes will be similar to our estimates, there are a lot of other factors to consider,” Dr Powell said.

“Let’s keep our eyes on population growth as overseas migration has made a sharp positive turn and will continue to be a hot topic into 2024.

“Supply chain delays and cost blowouts have already slowed down housing supply, creating a backlog of new home completions.”

Domain’s research also showed that high rents could also drive people back into the property market.

“If home loan repayments are on par with rental costs, borrowers can own a home at the end of the mortgage term without making major financial sacrifices,” the report stated.

“Even if the mortgage repayment is higher than rent, the increased cost of living is offset by rising house prices or the appeal of becoming a homeowner (a prospect that becomes increasingly appealing as you get

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