Interest Rates And The Banks – How They Affect House Prices

Sydney’s housing market has been at the forefront of Australia’s real estate trends, with huge growth for several years and now an easing of prices in response to market changes.

Find out how current trends in interest rates and regulation of the banking industry are affecting Sydney’s prices.

The current cash rate has been fixed at 1.5% for nearly two years now. This is both a very low rate and a long time without any change. We’ve also seen a slowing of lending rates, in part due to tighter scrutiny following the Royal Commission into Australia’s financial services.

Let’s take a deeper look at what this means for housing prices in Sydney, and your chance of getting the finance you need to invest.

Interest rates

Interest rates are guided by the official cash rate set down by the RBA.

The Board of the RBA is concerned with ongoing and increased strength in the Australian economy each time they meet to determine the cash rate. In recent months, they have kept the cash rate stable in response to current inflation and employment levels.

When it comes to the housing market, the RBA is concerned with facilitating continued growth while also maintaining affordability in line with inflation.

Raising the cash rate would provide a disincentive to borrow more, as the interest repayments on your loan would be higher. Conversely, the RBA can encourage more spending and an increase in prices by cutting the rates.

Recently, a stable cash rate indicates the RBA sees no need to curb housing prices. Conversely, we’re not at a stage where they want to facilitate a resurgence in growth.

Lending rates

The RBA sees no need to stall growth in the housing market because it’s already slowing. In April, Sydney saw a drop in prices year-on-year for the first time since 2012.

The dip in growth for Sydney’s markets is largely a result of tighter scrutiny placed on lenders, particularly the big banks, following the fallout of the Financial Services Royal Commission.

The Australian Prudential Regulation Authority (APRA) is the official body that oversees Australia’s lenders. They have tightened their policies after the Royal Commission exposed risky lending practices among the banks.

The result is it’s now harder than it was to get a loan, which impacts investors and first home buyers more than others, as they’re most likely to depend on sizeable loans.

Generally speaking, banks need to take into account your personal finances, as well as broader economic trends, when approving loans. This process determines how much you can borrow and the agreed terms of your repayments.

APRA is concerned with reducing the risk our banks and economy are exposed to through household debt. More oversight and stricter policies are designed to ensure average loans and repayments are in line with how much borrowers can afford.

This increased oversight means the banks will be rejecting more loan applications. Modelling by Morgan Stanley suggests this may result in the average approved loan falling 8% to $349,000 - that’s $30,000 less.

So with loan rates dropping, demand is naturally following suit and we are seeing the biggest effects in Sydney.

What does the future hold?

It’s important to keep the current developments in perspective. While we are seeing a slight decline in prices, Sydney is still hitting record high prices for amazing properties, especially in Sydney’s inner suburbs.

And although this may result in increased supply compared to demand, a long-term lens shows that demand is healthy, and will continue to be, as population growth shows no sign of slowing down.

This all means there is tremendous opportunity for both buyers and sellers.

Anyone who would have previously struggled to get into the market will see opportunities opening up (once past the lenders’ hurdles). Investors should be able to pick up properties at great prices with confidence in long-term returns.

It’s all about finding the right market and the right property for you. We know Sydney’s inner east and we know the market, so get in touch if you have any questions.