Interest rate rises lose their fear factor as home values stay strong

Frightening Reserve Bank interest rate rises have failed to create a house of horrors for real estate values. Here’s why.

Talk of another Reserve Bank interest rate rise on August 1 should be spooking property buyers, owners and investors, but the fear seems to have disappeared.

Rate rise number 13 since May last year would mean many people with mortgages pay 62 per cent more than they were just over a year ago – an extra $1300 a month on a typical $500,000 home loan.

Some borrowers face that fright in one big, scary whack as they revert from low-rate fixed mortgages to prevailing rates above 6 per cent.

So it seems strange that property prices are growing again in most capital cities. In some cities – Adelaide and Perth – prices are still at their peak, while Brisbane is less than 1 per cent below its peak and Sydney, Melbourne, Hobart and Canberra are down between 3 and 7 per cent but generally rebounding, according to PropTrack data for June.

Separate figures from CoreLogic suggest property prices have continued climbing in July in a majority of capital cities.

Home values appear immune to the big rate rises, worries about a recession, surging living costs and global uncertainty.

While we should be afraid, we are not stopping our spending on real estate.

Perhaps property people are seeing the rate of inflation fall in Australia and elsewhere from its 2022 highs, and believe this current interest rate pain will be short term – a potentially dangerous assumption.

More likely is a different kind of fear – the fear of missing out, and FOMO is alive and well in Australia.

While it’s incredibly sad that a growing generation of would-be buyers feel they will never afford a home because prices are so high, those with cash are happy to splash it on housing. Even if it costs 62 per cent more for mortgage repayments than it did in 2022.

At the core of home price strength is a supply and demand story. There are not enough houses for people – both owner occupiers and renters.

Hundreds of thousands of new people are moving to Australia – many of them cashed-up business success stories from offshore with money to spend.

The housing industry has been unable to keep up, and has been hamstrung by development issues and fixed price contract problems sending several builders broke.

Collapsing home builders makes it even harder to produce enough supply.

Meanwhile, surging rents also turn people’s thoughts to purchasing their own property rather than paying someone else to live in theirs, and government first homebuyer incentives make it easier for many to get their foot in the door with tiny deposits.

FOMO might keep demand for housing – and property prices – higher even if the RBA continues raising rates to get inflation back to its 2-3 per cent target range.

The only bright spots in this whole housing-inflation-rates debate are that savers are finally getting decent returns on cash deposits, and when interest rates eventually drop again people will find their finances suddenly stronger.

If today’s high interest rates are not scaring people off housing, nothing will. And that may be scary itself for would-be property buyers.

Originally published as Interest rate rises lose their fear factor as home values stay strong