Low interest rates
PIPA Chair Peter Koulizos. Image – supplied/RBA
  • Yes, you can borrow a million dollars and potentially only pay $20,000/year
  • However, interest rates don't have a strong correlation with property prices
  • ... according to analysis from PIPA

Almost every article this year about the ongoing property boom lays much of the reason at the door of historically low interest rates.

Commonly referred to as the ‘price of money’, the central bank cash rate has been at 0.1% since November last year.

It has never been that low before, and it shows no signs of being raised. The RBA is set on a course of driving unemployment down below 5% and will only countenance raising interest rates when wage inflation is in the 2% to 3% range. They believe this will not happen until 2023 or 2024.

So, in an era of cheap money, why not go out and borrow? After all, as one experienced real estate agent told me last week, “when you can borrow a million dollars and only have to pay $20,000 a year, why not borrow a million?”

Why not indeed. Home loan interest rates are as low as 2% now.

It’s not just interest rates

However, research over the past 20 years has shown that property price growth is “less dependent” on low interest rates than we have been assuming, according to the Property Investment Professionals of Australia (PIPA).

While the cost of borrowing has never been cheaper, when the cash rate is exceptionally low it means that the economy needs some extra financial stimulation, which has been the case pretty much since the GFC way back in 2008 and beyond,” said PIPA Chair Peter Koulizos, in a statement.

There are other factors at play, and these are stronger influencers of current property price growth, he believes.

“The current market conditions are unusual, given markets are rising in lockstep around the country, but this is predominantly due to extremely strong demand from buyers and a low supply of property for sale, rather than the fact that the cash rate is really only marginally lower than it was before the pandemic hit,” he said.

In other words, it’s good old fashioned supply (low) and demand (high).

Mr Koulizos’ analysis of the ABS’ ‘Established House Price Indexes’ for three periods over the past two decades when interest rates were stable found that low interest rates does not necessarily mean property prices rise.

Established House Indexes: Eight Capital Cities

PIPA-ABS-Stats
Source: ABS, PIPA

For example, from September 2016 to September 2019, when the cash rate was just 1.5%, the weighted average across eight capital cities saw the established house price index increase by only 1.24% over the period.

Likewise, between September 2013 and December 2014, the majority of capital cities experienced moderate price growth at a time when the cash rate was 2.5%, which was an historic low at the time.

“What my analysis showed is that low interest rates don’t light a fire under property prices,” Mr Koulizos said.

“Sure, sometimes prices in some locations might start to strengthen at the same time as interest rates are low, but this is usually due to a number of other economic factors being in play, such as strong population and jobs growth, or simply more demand than supply.”

Perhaps we overplay the role of interest rates in the property market?




You May Also Like

Melbourne property market sees mom and dad builders flock to outer suburbs for the best bang for buck

The cost of building a house in these top 20 suburbs started at $272,944 and topped out at $387,688.

Australian rental market clocks in a near-40% price growth, while wages struggle to keep up

Rents soared by almost 40% across the pandemic, while wages barely clocked in 20% growth.

Gender gap closes? Women outpace men in overall property ownership

Challenges persist for younger women in achieving homeownership, highlighting the need for targeted solutions.

Exclusive: Top five regional New South Wales housing markets revealed, the affordable alternatives to Sydney

Hotspotting has exclusively revealed to TPT New South Wales housing market’s five best regional hotspots for homebuyers and investors.

Experts Corner by The Property Tribune

Ko & NPA partner to launch several co-owned luxury properties at Mermaid Beach, Gold Coast

Ko's partnership with NPA Projects provides more opportunities to co-own off-the-plan holiday residences, including exclusive Gold Coast properties

Continue reading

Top Articles

Perth property market: The definitive guide to buying a modular home

Modular homes, misunderstood as inferior, offer efficient, durable alternatives to traditional construction methods.

The 50 square metre solution getting people into their first homes and delivering an answer to ...

Small, modular homes could be a key part of the broader solution to Western Australia's current housing challenges.

The hardest time ever to buy a house in Australia: How Australian home buying got ...

We're currently in a buyer's market, but that doesn't mean Australian house prices are crashing.