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  • Investing, Property
Factors keeping property prices stable in a rising interest rate environment

Oktay Sengoz

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16/08/2023

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2 min read

The property market in Australia has always been closely intertwined with fluctuations in interest rates set by the Reserve Bank of Australia (RBA). However, recent times have seen a shift in the usual dynamics. Despite a record 12 interest rate increases since May of the previous year, the property market has demonstrated resilience, with some regions even experiencing price rises. In this article, we delve into the multifaceted factors that are currently mitigating the impact of rising interest rates on property prices.

Evolving Influence of interest rates

Traditionally, RBA interest rate decisions were a decisive factor in dictating property market trends. However, the relationship between interest rates and property prices has become more complex. While rate hikes once directly correlated with price decreases, this paradigm has shifted due to a convergence of other factors.

Supply and demand dynamics

Supply and demand play a pivotal role in property market stability. The equilibrium between these two forces contributes significantly to current property price trends.

Demographic factors

Australia's demographic landscape has witnessed significant shifts in recent times, which are instrumental in shaping property demand and supply.

- Immigration

The reopening of Australia's doors to immigration after a prolonged COVID-19-induced closure has sparked a surge in demand for property. Immigrants, particularly those settling in major cities like Sydney, Melbourne, and Brisbane, are driving rental market pressure. This influx has led to a surge in rental demand, bolstering property prices in these areas.

- International students

The revision of a 2020 rule by the Chinese government has prompted international students to return to Australia for their studies. This has added to the demand for housing, with parents often purchasing properties for their children. Such transactions, driven by offshore funds, do not impact domestic interest rates or the property market directly.

Supply- side challenges

The supply of properties is facing challenges due to various factors, which contribute to the property market's current resilience.

- Construction costs

The construction industry has been hit hard by the pandemic, resulting in skyrocketing construction costs. Builders who signed fixed-price contracts pre-pandemic found it difficult to deliver projects at the agreed costs, impacting their profitability. Consequently, many developers and builders refrained from new projects. This has led to a shortage of properties on the market for purchase or rent.

- Lack of stock

The shortage of available properties has created a sense of apprehension among potential sellers, causing them to hold off on selling and upgrading or downgrading. This imbalance between buyers and sellers has contributed to a situation where property prices are remaining steady or even rising in certain areas.

Future outlook

The stability in property prices is likely to persist until a balance is achieved between supply and demand. Addressing this imbalance requires a multifaceted approach, including increased construction to boost housing stock and a stabilisation of immigration trends.

Implications for first home buyers

While stable property prices are beneficial for current property owners, first home buyers face challenges in entering the market due to affordability issues and increased competition.

The Australian property market's resilience in the face of rising interest rates reflects a dynamic interplay of supply and demand factors that extend beyond the influence of the official cash rate. Demographic shifts, immigration trends, construction challenges, and supply shortages have collectively shaped the current property landscape. As the market continues to evolve, it's essential to recognise the broader context that influences property prices, benefiting both existing property owners and those aiming to join the market. If you're curious about the value of 4 your property and exploring options to leverage its equity, don't hesitate to reach out to us for guidance.

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