How Interest Rates Are Impacting The Property Market

March 3rd, 2023 - by Brad Gillespie

In May 2022, the RBA raised the official cash rate for the first time since 2010.

It has lifted it again every month since (except January when its board didn’t meet). In the process, it has taken the cash rate from a record low of 0.1% to 3.35% in February 2023.

These rate rises, which have been passed on in full by the banks, are having both a direct and indirect impact on our local property market. We explore how and why.

Tighter budgets

Higher interest rates generally mean people have to pay more to get a home loan. Consider, for instance, someone looking to borrow $750,000 on a 30-year principal and interest loan.

Just over a year ago, when the banks were offering mortgage interest rates of 2%, their monthly repayments would be around $2,772 a month, according to MoneySmart’s mortgage calculator. Today, if they were to borrow at 5%, their monthly repayments would be closer to $4,026 a month. That’s $1,254 more each month.

Naturally, when people have to pay more to borrow, they can afford to pay less for a home, and this impacts property prices. We’re noticing this in our area, where some buyers are readjusting their budgets due to the increased amount of interest they have to pay.

The other part of the equation is that banks and lenders aren’t prepared to lend as much as they once were. That’s because they assess borrowers based on their capacity to repay at the current interest rate plus a serviceability buffer rate of 2.5%. Again, with less finance available to some buyers, they often may not be able to offer as much as they once could, even if they would like to.

Increased uncertainty leading to less activity

Rising interest rates don’t only have a direct effect on the property market; they can also have an indirect effect by creating an environment of uncertainty. When people don’t know what’s going to happen, they often fear the worst and hold off doing anything at all.

We’re noticing that a lot of would-be buyers are staying put and waiting to see where the RBA eventually lands when it comes to interest rate rises, as well as what effect this will have.

This is leading to less activity in the market because people who would have made a move aren’t listing their properties for sale. The result is that there is less stock than we’d expect to see at this time of year. In fact, January data from CoreLogic shows the number of sales across Sydney is -40.6% lower than at the same time last year.

The lack of listings in our area is particularly noticeable given late summer/early autumn is one of our traditional selling seasons. This has helped put a cushion under property values in our area, keeping the balance between supply and demand relatively stable so that prices haven’t fallen too far.

The resilience of the inner west and inner city market

As a result, here in the inner city and inner west, we haven’t necessarily seen the same significant declines that some parts of Sydney have experienced. Instead, our local property market is holding up comparatively well.

For instance, vendors should take heart that data shows that the median house price in Alexandria is down -6.7% over the past 12 months, while the median apartment price is down -5.7%. This compares favourably to a median citywide decline of -15.0% for houses and -10.4% for apartments.

More importantly, buyers who bought before the pandemic boom will still have locked in significant gains, despite the current market conditions.

That said, where we’ve noticed interest rates having their biggest impact is on people either getting into their first home or upsizing - especially from an apartment into a terrace. These are the buyers who generally need to take out the largest mortgages and for whom any movement in interest rates can have an immediate effect.

Other market segments, including downsizers and prestige buyers, are less likely to be affected because they tend to be cash buyers.

Should you buy or sell now despite rising interest rates?

So long as you factor potential rate rises into your budgeting, an environment like the current one can actually be a great time for getting into the property market or for making your next move. With less competition for properties, than you’d have in a rising market, you can afford to take your time and get your decision right. You may also find you have more room for negotiation with the vendor.

First home buyers may find that interest rate-induced recent price falls mean they can get into the market having saved a smaller deposit. It also means more properties fall under the threshold of the NSW and federal government’s first home buyer schemes.

Meanwhile, this can also be a great time to sell. Most sellers are buyers too, and upsizers are likely to find that the gap between properties has shrunk. For instance, if your property was worth $1 million and the one you want to buy is worth $2 million, the gap between the two is $1 million. If the value of both falls by 10%, your property is now worth $900,000, but the one you want to buy is now worth $1.8 million - a difference of $900,000. The reduced amount you need to borrow could offset any rise in interest rates.

And, if you’re selling to downsize, you should still receive a decent price for your sale, but you’re more likely than in a rising market to find a great next home.

Finally, the current conditions suit investors too. After all, not only do lower prices mean higher yields, rents are also rising - partly because would-be buyers are staying in the rental market instead of moving into their own home.

Want more?

In short, rising interest rates impact the market, but their effects aren’t all negative.

With prices down and less heat in the market, now could actually be a great time to buy property in Sydney’s inner city and inner west.

If you’re looking to buy or sell in our area, contact my team today.