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Rising interest rates won’t burst the property market

Interest rates don’t create property booms or busts, according to new research from the Property Investment Professionals of Australia.

Instead, the data shows affordability, local economic conditions, consumer sentiment, or access to lending are the biggest influences.

PIPA recently analysed five periods of increasing cash rate movements since 1994, proving that house prices continued to rise – sometimes significantly – even after rate rises of up 2.75 percentage points over just six months.

PIPA Chairman Peter Koulizos said the data showed rate adjustments were never the sole underlying reason for the strength or weakness of property markets.

“There has been much conjecture over the past 18 months that record low interest rates are the singular reason why property prices have skyrocketed, when the cash rate was already at a former record low of 0.75 per cent before the pandemic hit,” Mr Koulizos said.

“There are clearly a number of factors at play, including some buyer hysteria I’m afraid to say, but one of the main reasons for our booming market conditions is easier access to credit, which was simply not the case two years ago when rates were also low.

“At the end of the day, even when interest rates are low as they have been for years now, if people don’t have access to finance, it really doesn’t matter what the cash rate is.”

Recent alarmist commentary was apparently designed to scare people into believing rising interest rates would automatically cause property prices to fall significantly, Mr Koulizos said.

Likewise, he said, there had been a rise in scaremongering around borrowers being unable to afford mortgages following minor rate rises, by citing examples of extreme levels of mortgage debt, which did not reflect the norm.

“The latest ABS Lending Indicators showed that the national average loan size for owner-occupier dwellings was $574,000 in September, which shows that the vast majority of people are not racking up massive singular mortgages of $1 million or more,” Mr Koulizos said.

“While we don’t expect rates to rise for a year or two yet – and when they do, they are unlikely to ramp up rapidly – the monthly mortgage repayments on a $574,000 loan may increase by about $73 per week if the interest rate increased one percentage point, or from three per cent to four per cent.

“It’s vital to understand that new loans are already been stress-tested against much higher interest rates of about 5.65 per cent, so there is little to be gained by alarmist ‘forecasts’ that are just not supported by the data.”

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Nicole Madigan

Nicole Madigan is Senior Journalist and Content Producer for Elite Agent.

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