Several market factors created a perfect opportunity for the Australian housing market to thrive despite how the pandemic impacted the economy — but with impending interest rate hikes, the market could potentially make a sudden turn.

In NAB’s National Housing Market Update for March, CoreLogic director of research Tim Lawless said housing values have grown at such a high and surprising rate amid a period of low-income growth.

“Since the onset of the pandemic in March 2020 Australian housing values have risen by 24.6% adding, roughly $144,000 to the value of an Australian dwelling,” he said.

Record-low interest rates, increased affordability following the downturn in 2017-2019, surge in household savings and tight supply-demand dynamics, government incentives and positive sentiment about housing have all helped to boost the market.

“However, each of these factors are losing their potency to drive housing values higher.”

Australia’s median dwelling prices, despite clocking their 17th consecutive month gains in February, has been witnessing a growth slow down since April 2021.

Actually, February’s 0.6% monthly growth was the lowest since October 2020.

Lawless stated that the current market is facing a significant headwind from the increase in interest rates.

In anticipation of the Reserve Bank of Australia raising rates, major banks and other lenders increased their fixed rates in early 2021. The rate of increase was sharpest towards the end 2019.

Although variable rates have been reduced by some lenders, this trend is likely to reverse once the RBA raises the rates for the first-time in over a decade.

The RBA announced a rate hike in November 2010 which brought the cash rate up by 4.75%. Since then, cash rates have trended lower and reached a historic low of 0.10% a decade later.

“While mortgage rates are expected to remain well below average for an extended period of time, households are likely to be more sensitive to a higher cost of debt, considering housing debt ratios are at record levels,” Mr Lawless said.

The Australian Prudential Regulation Authority APRA reported that around 24.4% of new residential loans were lodged during the fourth quarter 2021. These loans had debt-to-income ratios of six times or higher.

“Housing affordability has been eroded by the high rate of growth in dwelling values alongside low income growth,” Mr Lawless said.

Comparing March 2020 and December 2021, the difference in housing value was 22.6%. Wages grew only 3.3%.

“Measures of housing sentiment have been reducing since November 2020, reflecting a mix of affordability challenges and rising mortgage rates,” Mr Lawless said.

“More broadly, consumer sentiment could be further negatively impacted by Russia’s invasion of Ukraine, triggering a new wave of global uncertainty.”

Is there enough good news for a sharp drop?

There are many factors that could cause an unexpected boom to stop, but Mr Lawless indicated that there are some positives that can protect the market against a sudden drop.

For instance, while demand may slow down in certain markets as a result of higher interest rates, it can be supported through the opening of borders nationally and internationally.

“While a return of overseas travel is not expected to boost home buying demand immediately, we are expecting stronger rental demand in key areas such as inner city precincts popular with foreign visitors and students,” he said.

A better economic environment and higher wages will also help to ease housing demand, which in turn will limit distressed property sales.

“Hopes that 2022 would deliver more certainty and less disruption are looking far-fetched at the moment, with the east coast of Australia encountering record levels of rainfall and extreme flooding, the invasion of Ukraine stoking global uncertainty, and prospects for higher inflation and wages growth potentially forcing interest rates higher,” Mr Lawless said.