interest rates impact property prices less than you think
How much mortgage rates impact property prices might surprise you. Image: Canva.
  • Prices fell as mortgage rates rose
  • Other factors may have a more significant impact like population growth
  • Analysis found the impact of rate rises were not consistent across Australia

As the mortgage rate rose, house prices fell, but that is only a fraction of the story. Many factors play into the equation, with new analysis from Domain finding rate rise impacts varied by location and with time.

The bigger they are, the harder they fall

Domain’s analysis found house prices declined across the nation by 1.34% when mortgage rates rose by one percentage point over a quarter.

Higher-value property markets were hardest hit, with Brisbane seeing a 2.45% fall in property values per percentage point rise in mortgage rates, and Sydney dropped by 1.96%.

That turned out not to be a trend across the eastern seaboard or for all high-value housing markets, the analysis found Melbourne only saw a drop of 0.89%, almost half the rate of Sydney when mortgage rates rose.

Domain said: “The underlying cause may be that Melbourne has experienced the most rapid population growth rate historically and is set to become Australia’s largest city (population-wise) by 2031-32. The rapid population growth has continued to drive an increase in housing demand despite increases in mortgage rates. Even with the negative demographic shifts during the pandemic, Melbourne has made a quick population recovery.”

What happens to house prices when mortgage rates rise by 1 percentage point?

what happens to house prices when mortgage rates rise by one per cent
Source: ABS, Domain. House price declines are over a three-month/quarterly period, based on a 1 percentage point interest rate rise.

Population pushes up property prices

The impact of mortgage rate rises is only significant in the short term, said the analysis, weighing on an individual’s decision to buy a property today.

In the long term, population growth was found to have a more significant impact, with a 1% increase in Australia’s population bringing the long-term cumulative house price up by 8.18%. One of the reasons: people periodically upsize.

“This suggests that over time, changes in population are more impactful to the property market movements than mortgage rates,” said the analysis.

What happens to house prices when population increases by 1%?

What happens to house prices when population increases by 1 percentage point
Source: ABS, Domain. House price rises are based on a 1% increase in the population over a longer term cumulative.

“Mortgage rates should play a role in determining the home loan amount you are willing to borrow, especially concerning serviceability buffers. But our analysis shows that mortgage rates aren’t as important for house prices in the long term,” said Domain Chief of Research and Economics, Dr Nicola Powell.

“It’s important to remember that multiple factors influence the market from house-price fluctuations and population patterns to income growth, tax regimes and even lifestyle preferences.”

“In this price cycle alone, while property prices have been falling, they still remain much higher than before the pandemic property boom, with houses across the combined capitals remaining about $204,000 higher than the mid-2020 trough. The property market is cyclical, and my advice, for now, is to tighten the purse strings and hold on while we all ride out the uncertainty of this price cycle.

“Our analysis is based on past data, so while we can assume that future house price fluctuations because of mortgage rate changes will be similar to our estimates, there are a lot of other factors to consider. Let’s keep our eyes on population growth as overseas migration has made a sharp positive turn and will continue to be a hot topic into 2024. Supply chain delays and cost blowouts have already slowed down housing supply, creating a backlog of new home completions. Government planning around future supply should be high on the agenda over the years to come,” commented Powell.

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