Incoming interest rate hikes might not stop housing boom: PIPA

author-avatar By
on November 15, 2021 Fact Checked
Incoming interest rate hikes might not stop housing boom: PIPA

Cash rate movement hasn't historically caused the property market to 'boom' or 'bust' according to new research.

New research by the Property Investment Professionals of Australia (PIPA) revealed that high or low interest rates haven't historically influenced property prices.

Instead PIPA found factors such as affordability, local economic conditions, consumer sentiment, or access to lending has sparked market activity.

PIPA analysed five periods during which the cash rate increased, which showed that house prices continued to rise - sometimes 'significantly - after rate hikes of 275 basis points.

For example, the 275 basis point cash rate increase from June 1994 to December 1994 still saw house prices increase 1.1% during that time.

It's been 11 years since the Reserve Bank last increased the cash rate.

Dates Cash rate increase House price increase
June 1994 to December 1994 2.75% 1.1%
September 1999 to September 2000 1.5% 7.5%
March 2002 to December 2003 1% 35.7%
March 2006 to December 2006 0.75% 8.4%
June 2007 to March 2008 1% 8.9%
September 2009 to December 2010 1.75% 10.5%

Source: PIPA, RBA, ABS

PIPA Chairman Peter Koulizos said the strength or weakness of the property market often had more to do with local economic conditions such as affordability, and that rate adjustments are 'never the sole underlying reason'.

"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 said.

"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."

'Alarmist' commentary driving property market speculation

Mr Koulizos said alarmist commentary is being used to scare people into thinking property prices would automatically start falling significantly once interest rates go up.

Additionally, he referenced the use of 'scare mongering' about people not being able to afford their mortgages once rates rise, even just by just one percentage point, by using examples of extreme mortgage debt. 

"The latest ABS lending indicators showed that the national average loan size for owner-occupier dwellings was $574,000 in September, which shows that the vast majority of people are not racking up massive singular mortgages of $1 million or more," Mr Koulizos said.

"It’s vital to understand that new loans are already being stress-tested against much higher interest rates of about 5.65%, so there is little to be gained by alarmist 'forecasts' that are just not supported by the data."

Mr Koulizos said that if interest rates were to rise by one percentage point on a $574,000 loan, the monthly repayments may increase by about $73 per week.

APRA considering limits on 'higher-risk' loans

APRA recently released an information paper warning that stricter lending restrictions on higher-risk loans may be deployed to manage "systemic risk" in the financial sector.

Alex Lawler, Lending Support Manager at digital lending and payment provider WLTH, said this move comes with the release of data revealing household debt is higher than income.

"While Australia's overall lending standards have, for the most part, remained sound, there have been signs of some increased risk-taking," Mr Lawler said.

"History suggests that large and mid-sized lenders reacted differently to APRA's policies."

Mr Lawler said the four major banks are known for transitioning their lending into mortgage types not target by strict policies by cutting interest-only lending.

On the other hand, mid-sized banks didn't mirror this strategy; the difference may be linked to the big banks' operational systems being 'more capable' of implementing the move according to Mr Lawler.

"Removing these strict limits will come with sufficient improvement in lending standards and reducing the identified risks," he said

"However, should debt continue to climb, APRA may consider launching policy tools that it has been exploring that can help with lowering."


Advertisement

Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Lender
Advertised rate Comparison rate Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval

VariableMore details
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
VariableMore details
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
VariableMore details
REFINANCE IN MINUTES, NOT WEEKS

Nano Home Loans Variable Owner Occupied, Principal and Interest (Refinance Only)

  • Refinance only. Fast online application
  • No Nano fees. Free 100% offset sub account
  • Mobile app, Visa debit card & instant payments
REFINANCE IN MINUTES, NOT WEEKS

Nano Home Loans Variable Owner Occupied, Principal and Interest (Refinance Only)

  • Refinance only. Fast online application
  • No Nano fees. Free 100% offset sub account
  • Mobile app, Visa debit card & instant payments
VariableMore details
NO UPFRONT OR ONGOING FEES

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
  • No upfront or ongoing fees
NO UPFRONT OR ONGOING FEES

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
  • No upfront or ongoing fees

Rates correct as of November 27, 2021. View disclaimer.


Image by Matese Fields on Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

Latest Articles

author-avatar
Rachel is a Finance Journalist, and joined Savings in 2021. Coming from a background in the FinTech space, her interests include the innovation of lending technology, property, investing, and more. With a passion for educating and informing people about their finances, she hopes to increase the financial literacy of everyday Australians.

Be Savings smart.
Subscribe for free money newsletters.

By subscribing you agree to the Savings Privacy Policy