Have We Seen The End Of Property Price Falls?

Have We Seen The End Of Property Price Falls?

Over the last 10-12 months there’s been much debate around interest rates rising, election promises and housing market speculation. Certainly, we’ve seen some inner-city areas in some states mostly affected with some price corrections however there does seem to be a slowing of any price correction and now with the influx of new migrants and foreign students some expect prices to start growing… However, have we really seen the full effect of interest rate rises even as they have not yet stopped rising? Probably not!

So welcome to this month’s topic where we look back over the past 30 years to see how home prices have correlated to interest rate changes.

So… what do you think?

Have we seen the end of property price falls?  Or will property prices fall further, as interest rates rises start to bite?

Great Question!

Lenders are increasing their home loan interest rates with 10 cash rate increases so far. With the expectation this will continue for the next few months, some clients are wondering if we’ve seen the end to decreasing property values or is this the silence before the storm.

Obviously when interest rates rise, larger mortgage repayments make it more costly to hold a property.

Some assumptions are:

• there will be less people who can afford to buy a house,
• there will be more properties on the market as investors and homeowners who have overextended themselves try to sell up, not much evidence of this yet, and
• higher rates could therefore cause house prices to fall for an extended period.

Interestingly however, history shows a very different picture. 

As sophisticated property holders and investors, we should always check the facts before jumping to conclusions.

Let’s have a look at the correlation of median property prices and home loan interest rates over the past 30 years.

Most of us have heard of the incredibly high interest rates in the 1980s. Some property owners (probably your parents) were paying up to 17% interest! Can you imagine that?

Yes, the median house price as seen in this chart was only about $150,000, however the average income (per person) was only $26,436.80¹.

What I find most interesting is when you follow the chart above, despite a few bumps along the way, property prices have continued to rise regardless of interest rates rising or falling.

So looking closely at this chart, you can see that interest rates over the past 30 years have not resulted in a fall in the median house price for a significant length of time.

What the historical facts suggest is that sometimes when interest rates fall, the median house price may rise – but it doesn’t always happen this way.

There’s even less historical evidence to suggest that a rise in interest rates will necessitate a fall in house prices. In fact, the real data shows this to be the exception rather than the rule!

There are plenty of examples over the last 30 years where Australian housing prices have actually risen at the same time that interest rates were rising (see 2000-2008).

Property researchers have many contradictory opinions about a flattening or drop in property prices, but we all know if we can hold on through this period, a good property will always come out on top again.

That’s fine you might say, but a 2% increase on a $1,000,000 mortgage is significant. And yes, we agree.

The following table shows your monthly mortgage repayments with a 1% and 2% increase.

How much could mortgage repayments rise for a new owner occupier borrower?

Source: theguardian.com/business/2022/apr/29/interest-rates-are-set-to-start-rising-what-does-that-mean-for-mortgage-holders-and-homebuyers – Date: April 2022

For those on variable rates and have not had their loan reviewed in the last year you should definitely reach out now as the rates appear to be stabilising and see what incentives and rates are available for you to obtain a better deal.

For those wise enough to have fixed their loans a few years back, we recommend starting to plan for the repayment shock you will experience when you come off your fixed loan.

Let’s now look at what is happening with fixed interest rate loans.

With the prospect of continuing rate rises, many clients are turning to us wanting to know if NOW is the right time to fix their home loan or investment property rate.

Traditionally the fixed interest rate market sits at about 15% of all home loans. However, for nearly half of home loans settled mid 2021, according to the ABS² the number of fixed interest rate loans peaked in July 2021 at 46%³. So, if you didn’t fix it then, unfortunately you have missed the boat on low fixed interest rates.

Proportion of fixed vs variable new loans

However, variable rates are now consistently lower than fixed rates. Remember, we have direct access to dozens of lenders who still have competitive and very low variable rates. So, don’t be shy in asking us what we could achieve for you.

Let’s finish with this thought…

There are always opportunities in times of change – we just have to act on them…

We should continue to be wary of treating the Australian property market as if it is just one single market where all areas/suburbs perform the same. It is not!

The Australian housing market has over 15,000³ individual suburbs, each having its unique market and own set of individual dynamics.

Whether interest rates go up, down or sideways, there will always be suburbs where prices are also going up, down or sideways independent of what is happening with interest rates. There are many elements contributing to why property prices move in any direction.

What is important is not so much where interest rates are heading, but what is going on in the suburbs where we own property or plan to invest, and how we can ensure those individual suburb trends work in our favour rather than against us.

See also our recent article on why loyalty to your lender doesn’t always pay: HERE

Sources:

1. ausstats.abs.gov.au/ausstats/free.nsf/0/27DCE5C6FF74CEFBCA2574FF0018707D/$File/63020_AUG1989.pdf
2. Australian Bureau of Statistics
3. abs.gov.au/statistics/standards/australian-statistical-geography-standard-asgs-edition-3/jul2021-jun2026