Interest rates play a significant role in shaping the property market, but their effects are often not immediate. The property market typically lags behind interest rate changes by several months.
For instance, at the time of writing, interest rates were expected to stabilise around the end of 2024. The full impact on property prices however might not be realised until mid 2025.
Understanding this lag and its implications can help both buyers and investors make informed decisions.
How interest rate changes influence the property market:
1. Housing affordability and buyer demand
When interest rates rise, borrowing costs increase and make mortgages more expensive. This can lead to a decrease in buyer demand as fewer people can afford to take out loans.
Conversely, when interest rates fall, borrowing becomes cheaper, buyer demand increases and property prices are driven up.
2. Price disparities between houses and units
Recent trends have shown a widening gap between the price of detached houses and units.
According to CoreLogic research, since the pandemic house prices in major Australian cities have increased significantly more than unit prices. This disparity has driven many buyers towards higher density living options, such as apartments, because of affordability constraints.
3. Demographic influences
Population growth, particularly from overseas migration, tends to support demand for units and apartments.
New arrivals often initially rent, however they may eventually translate into buying.
The cultural preference for detached houses on larger plots of land remains strong in Australia. This contributes to the disproportionate growth in house prices.
4. Supply and demand dynamics
The supply of housing also plays a crucial role. An undersupply of new dwellings, combined with strong population growth, puts upward pressure on prices.
Conversely, an oversupply can lead to price declines. Current trends indicate a shortage of housing supply, particularly in high demand areas, that continues to support property prices despite rising interest rates.
5. Economic climate and consumer confidence
The overall health of the economy and consumer confidence significantly impact the property market.
Economic indicators such as employment rates, GDP growth and inflation influence buyer sentiment.
When consumer confidence is high, people are more likely to make significant financial decisions such as purchasing property.
Conversely, economic uncertainty can dampen buyer enthusiasm and slow market activity.
