Rising interest rates don’t burst property markets

There is much speculation growing about the effects of interest rate changes on our property market, but is there reason to panic?

A headline doing the rounds over the weekend suggesting that the average household in the raft of suburbs will be pushed into mortgage stress if interest rates climb just 1%.

Then there are the headlines suggesting property values could plummet 15 to 20% if interest rates rise just 1%.

Now we know that falling interest rates increase borrowing capacity and fuel housing price growth.

And while rising interest rates decrease borrowers’ capacity, this doesn’t necessarily mean that the value of houses in Australia suburbs will slump.

Recent research results conducted by the Property Investment Professionals of Australia (PIPA) showing a timeline of interest rates and its effect on the market confirm this.

In fact, history shows that interest rates do not force property markets into booms or busts, rather it’s often affordability, local economic conditions, consumer sentiment, or access to lending that does.

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

Cash Rate Rises and House Price Movements


Time period





Cash rate increase

House price increase



June 94 –

Dec 94




Sept 99 –

Sept 00




March 02

– Dec 03




March 06

– Dec 06




June 07-

March 08




Sept 09 –

Dec 10


Sources: RBA and ABS Residential Property Price Index

PIPA Chairman Peter Koulizos said while the strength or weakness of property markets often had more to do with local economic conditions, including affordability considerations, the data shows that rate adjustments are never the sole underlying reason.

“There has been much conjecture over the past 18 months that record -ow-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,” he 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.”

Mr. Koulizos said some alarmist commentary was being currently being peddled to seemingly scare people into thinking that when interest rates start to rise property prices will automatically start to fall significantly.

Likewise, he said, there appeared to be some scaremongering about many borrowers not being able to afford their mortgages once rates rise by just one percentage point by using extreme levels of mortgage debt as examples.

“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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