Property Investment Professionals of Australia(PIPA) states that while house prices have been slowing, it is not expected that they will crash like many believe.

PIPA’s latest analysis of five rate rise periods between 1994-1995 showed that house prices continue their upward trend despite significant increases in cash rates.

The fact is that house prices rose 35.7% between December 2003 and March 2002.

In the same time frame, there were four 25bps rises, pushing interest rates to 5.255% at 2003’s close.

The cash rate was stable up to a 25bps rise in March 2005.

Bigger factors at play

Peter Koulizos (PIPA Chairperson) stated that other factors are important in determining strength of the housing market.

“There has been much conjecture over the past 18 months that record low 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% before the pandemic hit,” he said.

Mr Koulizos believes that the current boom market conditions can be attributed to easy credit access. This is a marked improvement over rates that were low two years ago.

“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,” he said.

Koulizos stated that prices can be affected by consumer sentiment and local economic conditions.

Alarmist claims surface

According to Mr Koulizos recent interest rate developments were used to scare homebuyers, as well as borrowers, about a possible price correction as tighter access to mortgages.

The Reserve Bank of Australia maintained the cash rate at 0.1% in its latest monetary policy meeting.

Although the central bank doesn’t believe there is any chance of a cash-rate increase until inflation is at an optimal level and unemployment numbers are at an optimal level, it did modify its forecast as to when these targets could be achieved.

The RBA predicts that these economic factors will achieve their target by 2023. This is one year earlier than originally predicted.

Koulizos advised borrowers to not be worried about the immediate effect of rising interest rates upon mortgage affordability.

“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 $1m or more,” he said.

According to Mr Koulizos, new loans are already stress-tested against higher rates of interest so a gradual rise would not be as harmful as the alarmists predict.

“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 3% to 4%,” he said.