What will happen to the housing market when interest rates start increasing?
This is a very common question at the moment in Sydney. The last time the Reserve Bank of Australia (the 'RBA') increased the official cash rate was in Nov 2010 when it increased to 4.75%. The last decrease was in November 2020 down from 0.25% to 0.10%.
However, the interest rate you pay the bank is not a direct correlation to movement in the RBA cash rate, and in fact, mortgage holders did have increases in home loan rates in the period of 2011 to 2019, especially investors during the 2016-2019 period. At the same time, the property market continued to evolve and grow, and Sydney's eastern suburbs and inner west have continued to record growth over this time. Lending criteria and other policy changes e.g. Strict limits on the level of interest only loans have a greater effect on the housing market than movements in interest rates.
Coming out of two years of pandemic and low economic growth, it is forecast the cash rate will increase from 0.10% to at least 1% by the end of 2022. This would see owner occupied variable rates increase from around 2.2% to 3.2%. This is still below where rates were in 2017 when Sydney recorded 3.1% annual growth. Of course, house prices and debt levels have continued to rise, but lending criteria have also been more restrictive.
The current market (April 2022) is a buyer's market - a good level of A grade properties on the market, vendor price expectations have decreased compared to Nov/Dec 2021, and competition is 3-4 registered bidders at auctions compared to the average 8-10 in 2021. We are also seeing more properties sell before the auction or pass in. The RBA cash rate is almost certain to increase in May or June from 0.10% to 0.50% (a 40bps increase), with a federal election in the middle there.
The property market is all about supply and demand. Currently, there is more supply than demand, hence it is a buyer's market. Moves in the RBA cash rate this year, and an increase in borrower interest rates back into the 3% or 4% we saw in 2017, are not going to significantly impact the demand for housing in these parts of Sydney. It may impact borrowers' comfort levels with the amount of debt they are taking on and need to pay back, e.g. People may be willing to trade off that extra bathroom, or forego off street parking, but this will not have significant impacts.
The supply of houses will likely slow over the next few months as fewer vendors will list their property while it is a buyer's market, and while there may be an increase in properties selling due to financial difficulty, this will merely supplement the supply which is missing from people looking to 'cash in' on rising prices.
There is a lot of media hype about a property market crash in Sydney, so hopefully, you now feel informed to understand that moves in interest rates in 2022 are not going to send property prices 'crashing'. If you are looking to buy, you have spoken to your bank or mortgage broker, and have your finances in order, then now is a great time to find the right property.
If you have found ‘the one’ and would like to engage Purchase with Penny to bid at auction on your behalf, find out more about our Auction Bidding services.
