Past performance does not predict future results – we’ve all heard that before.
But it’s also said that an understanding of history can help us prepare for the future.
So with all the recent talk of the Reserve Bank of Australia (RBA) increasing the cash rate in 18 months (or so), and fixed rates already going up as a result, now’s an important time to look at what has happened to property prices when interest rates rose in the past.
History suggests that interest rates do not force property markets into booms or busts, rather it’s often affordability, local economic conditions, consumer sentiment, or access to lending that does, according to a Property Investment Professionals of Australia (PIPA) analysis.
The PIPA analysis looks at the six periods of increasing cash rate movements since 1994, and the corresponding national house price movements, which we’ve summarised below:
June 1994 to December 1994: Cash rate increase: 2.75%. House price increase: 1.1%.
September 1999 to September 2000: Cash rate increase: 1.50%. House price increase: 7.5%.
March 2002 to December 2003: Cash rate increase: 1.00%. House price increase: 35.7%.
March 2006 to December 2006: Cash rate increase: 0.75%. House price increase: 8.4%.
June 2007 to March 2008: Cash rate increase: 1.00%. House price increase: 8.9%.
September 2009 to December 2010: Cash rate increase: 1.75%. House price increase: 10.5%.
Well, for starters, for those holding out for a cash rate rise in the hope of buying during a price dip, history is not on your side – not once did house prices fall during the above periods.
PIPA Chairman Peter Koulizos says the strength or weakness of property markets is often influenced by more than just cash rate adjustments.
“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,” Mr Koulizos pointed out.
“There are clearly a number of factors at play, including some buyer hysteria I’m afraid to say, but one of the main reasons for our booming market conditions is easier access to credit, which was simply not the case two years ago when rates were also low.”
Well, the most obvious impact of a cash rate rise is that interest rates will go up, which means your home loan repayments might increase each month.
And that could have a flow-on effect for other parts of the economy, such as housing values, explains CoreLogic’s research director Tim Lawless.
“We are already seeing the rate of house price appreciation ease due to affordability pressures, rising stock levels and, as of November 1st, tighter credit conditions,” says Mr Lawless.
“Once interest rates start to lift, there is a strong chance that housing prices will head in the opposite direction soon after.”
Well, that depends on your current financial situation.
If you’re a prospective first home buyer suffering from FOMO, or someone looking to upgrade over the next two years, don’t be disheartened by increasing property prices: now’s the time to start planning ahead.
Planning ahead involves understanding your borrowing capacity, your property goals, and your current expenditures – this can help you determine what changes you can make before you pull the trigger on a purchase.
On the other hand, if you’re a current mortgage holder, now could be a good time to reassess whether you should lock in a fixed interest rate.
Indeed, many lenders have recently increased the interest rates on their 2-, 3-, 4- and 5-year fixed-rate home loans to head off the cash rate rise, and this latest statement from the RBA could trigger more rate hikes.
So if you’ve been on the fence about fixing your rate, it’s definitely worth getting in touch with us sooner rather than later.
We can run you through a number of different options, including fixing your interest rate for two, three, four or five years, or just fixing a part of your mortgage (but not all of it).
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