Rates Up?

With the release this week that annual inflation has kicked up to 3.7% brings with it an increased chance the Reserve Bank will raise official interest rates next time they meet. Normally, rising interest rates have an adverse impact on property markets. Affordability and loan serviceability are impacted with some would-be buyers no longer able to secure funding for a property purchase.

In theory, as rates rise demand falls as markets predict an increase in supply as some property owners move to sell due to increasing mortgage costs. Investors re-do their sums on returns mindful that increases in rates adds to their holding costs.

This time around, will this higher inflationary environment and higher interest rates take the shine off the local property market? Not likely. Our market remains savagely undersupplied(down 30% on last year’s low listing levels), with pent-up buyer demand at such levels that even if an exaggerated 10% of buyers fall away due to increased borrowing costs from a 25-basis point rate rise, there remains plentiful buyers across most price sectors in the market.

Where property sellers remain aligned with market sentiment, most properties are selling today well above evidential levels from comparative sales a few months ago. To damper underlying demand, especially given the prudential regulator demands lenders assess a borrowers’ serviceability sell above existing typical mortgage rates, rates would need to rise to depression-like levels. Housing supply would have to rise too.

Rate rises impact first-home buyers the most as they tend to be more sensitive to changes in borrowing costs and serviceability requirements. Despite the rapid price rises here, Perth remains relatively affordable, with lower average loan sizes and higher wages than most of the other capitals. This relative affordability means buyers are better placed to absorb moderate increases in repayments.

While higher interest rates might place downward pressure on the speed of price growth, it’s not likely result in widespread price declines. Instead, a moderation in growth might result after a series of rate rises, with prices continuing to rise but at a more measured pace. Certainly, lower quartile priced property will attract more attention in this scenario.

Overall, an interest rate rise may moderately temper activity in the Perth property market rather than reverse it. Strong underlying demand, limited supply, and relative affordability suggest the market is well positioned to withstand higher rates, with growth likely to continue.