Will rising rates stop house prices rising?

Despite conjecture that rising interest rates will dampen Australia’s property market, evidence to date suggests these increases have had little cooling effect. Even during the typically quieter King’s Birthday Long Weekend, preliminary figures show house prices could be on the upswing for the fourth consecutive month.

Despite a constrained supply over the public holiday, auction clearance rates remained robust at over 70%. This buoyant activity, evidenced by substantial bidder involvement, underscores the vibrancy of the auction market.

Compared to November last year, when the average number of bids at auctions stood at two, current figures show buyers are making nearly three bids at auctions in Sydney, Melbourne and Brisbane. In Adelaide, the number of bids is closer to four.

While many buyers and home sellers expect June’s rate hike might have marginally dented buyer and seller confidence, there has been a marked lift in clearance rates, which were just 54% at this time last year.

Even amid recession rumours, the ongoing uptick in the market remains a contentious point for investors. Although prices continue to rise, the increments remain relatively modest, with a 0.8% increase in March, 0.7% in April, and 1.4% in May.

Our estate agents are observing considerable anxiety as a result of persistently high inflation and cost-of-living pressures. Yet, in many locales, we are witnessing small but definite lifts in prices.

Naturally, there’s an age-old debate between people who believe rate hikes will soften prices and those who argue that surging immigration and limited supply will sustain price escalation.

To find the most likely truth, we can really only look to Australia’s historic property market performance during periods of rising rates. If we look back to the 1970s, 1980s and 1990s, house prices – broadly speaking – continued an upward trajectory despite rising rates, and we see some similar contributing factors today. Even when interest rates rose to in excess of 18 per cent in the 1980s, house prices kept rising.

Through that period, factors underpinning rising Australian house prices were:

  1. Population Growth: Australia experienced substantial population growth in these decades, partly driven by immigration. This growth in population increased the demand for housing, thus putting upward pressure on prices.
  2. Urbanisation: During these years, Australia saw a significant trend towards urbanisation, with more people moving into cities for work and lifestyle opportunities. This increased demand for housing in urban areas and subsequently pushed prices up.
  3. Income Growth: Over these decades, Australia saw considerable growth in real incomes. As people’s purchasing power improved, they were able to afford higher property prices.
  4. Financial Deregulation: In the mid-1980s, Australia underwent financial deregulation, which included easing of restrictions on foreign banks, thereby increasing competition. This led to a greater availability of credit, which made it easier for people to secure mortgages and increased demand for housing.
  5. Tax Policies: Australian tax policies, such as the capital gains tax exemption for the primary residence and negative gearing, have been supportive of property investment. These policies increased the attractiveness of property as an investment, thereby pushing up demand and prices.
  6. Limited Supply: Finally, the supply of new houses did not keep pace with demand, especially in popular urban areas. Land release policies, planning regulations, and the physical constraints of building in established cities restricted the supply of new homes, thereby putting upward pressure on prices.

Another reason that rate hikes don’t necessarily mean falling house prices is that rising rates perpetuate the broader supply freeze in the property market. Each rate increase complicates the construction of new houses, leading to fewer new builds and increased demand for existing properties.

Commonwealth Bank, the country’s largest mortgage lender, has maintained its market forecasts in the wake of the recent rate increase. The CBA’s predictions are optimistic, forecasting a 3% average house price rise this year and a 5% increase next year.

This creates a challenging predicament for the Reserve Bank of Australia as rate increases continue to exacerbate the current supply-demand imbalance. This pressure impacts home buyers and renters, yet also provides an opportunity for investors prepared to navigate the turbulent market.

For investors, the issue lies in the sudden surge in mortgage rates, with homeowners facing rates above 6% and investor rates exceeding 7%.

Whatever your view as to the property market outlook, most Australians would agree we’ve seen fundamentally strong housing market conditions over the past 25 years. Since 1993, median house and apartment process have risen 412 per cent and 316 per cent respectively. Wage growth hasn’t kept pace with property prices this time, and cost-of-living pressures are being felt acutely across the country, but our country’s chronic undersupply of housing continues to underpin stable and rising house prices, and most likely will continue to do so for the foreseeable future.


The following advice is of a general nature only and intended as a broad guide. The advice should not be regarded as legal, financial, or real estate advice. You should make your own inquiries and obtain independent professional advice tailored to your specific circumstances before making any legal, financial, or real estate decisions. Click here for full Terms of Use.

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