MUST READ!! 3 key reasons why an interest rate increase isn’t likely to cause a property price correction!
There is a lot of discussion currently about the property market with both mainstream media and economists predicting negative sentiment! It is important that you don’t always listen to the mainstream media in relation to property, rather looking to the facts and market indicators. The media like to instill fear in people to create more ‘clicks’ and viewers. This can cause you to live in a constant state of fear and never make the decision to purchase and reap the rewards property has to offer.
If I listened to the media in March of 2020, I wouldn’t have bought a property in the middle of the Covid-19 Pandemic in March 2020, and wouldn’t have made a 30% return on that purchase to date. As a Buyers Agent, I like to study past performance of the property market, and whilst this doesn’t allow us to predict the future, it arms us with the knowledge of the past to make more educated decisions about what we may experience in the future.
Today, I want to discuss 3 key reasons why the property market in certain areas around the country will not be affected if we see interest rates rise. Whilst we may not see the same level of growth achieved in 2021, even if we could achieve growth of 10% for the year, this would still be an exceptional result which I’m sure you would like to achieve on your investment.
Reserve Bank of Australia Statement on interest rates
The Reserve Bank of Australia has repeatedly stated they will not make any changes to the official interest rate until 2024. This is still 2 years away. Below we will discuss the banks cash buffer included as part of their assessments and why this mitigates the risk if an interest rate rise was to occur.
Historical evidence that growth isn’t led by low interest rates
In the late 1980’s there was a massive price boom across Australia, similar to the Australia wide property boom we are currently experiencing. During this time, interest rates were at historic highs with rates increasing to around 17% whilst a property price boom was occurring. Those 17% rates were significantly higher than the current rates and yet these high interest rates did not negatively impact the housing price boom.
The last national property boom we experienced in Australia was between 2001-2004. These were times of high interest rates also, with interest rates on home loans sitting around 7%-7.5%. The Reserve Bank of Australia had multiple interest rate rises during this time, however the property boom continued trending upwards.
What does history tell us? We can learn from past property booms that a couple of interest rate rises typically don’t significantly impact property prices and for these interest rate rises to impact the property market and cause a decrease in prices, we would typically need to see in excess of 5 interest rate rises.
Mortgage stress and property prices to fall
Some believe that an increase in interest rates will see many Australians unable to afford their mortgage repayments, causing them to default on their loans.
It’s important to keep in mind that the banks currently assess borrowers with a cash buffer in place, mitigating the risk for both the borrower as well as the banks. For example, if a borrower was obtaining a rate of 2.50% on their loan, with a buffer of 3.00%, the actual assessment would be based off their ability to service an interest rate of 5.50%. This buffer has recently increased in October 2021 from 2.50% to 3.00%.
Therefore, the Reserve Bank of Australia would need to increase the official cash rate higher than the buffer amount the individual borrowers were assessed on (currently 3.00% as at December 2021) to see these defaults start to occur.
These are just several reasons why we, as well as many experts in the industry, believe that rate rises will not cause a property price correction in the short term. If you have any questions or want to discuss this further, please reach out to us at info@tayloredpropertywealth.com.au.
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