Potential interest rate rises dampen property demand but prices could rise again

House prices are falling in some areas as concerns about interest rate rises dampen demand but one expert believes they could rise again.

Property prices are already beginning to fall slightly in some areas with many buyers cautious amid talk of looming interest rate rises — but one expert believes it is possible prices could continue to rise later this year.

REA economist Angus Moore said its latest PropTrack data report showed property prices grew 0.3 per cent nationally in March, which is the slowest rate of growth since May 2002.

“It may be slow but prices nationally are still growing,” Mr Moore told news.com.au.

There were however, differences across the cities.

Mr Moore said prices in Melbourne and Perth fell slightly compared to February, while Sydney prices grew by 0.3 per cent.

The Reserve Bank of Australia (RBA) has not yet increased the cash rate but some banks have already increased fixed interest rates, and talk of even higher rates has spooked some buyers, which is impacting prices.

More recently the RBA has estimated house prices could be 15 per cent lower than expected over the next two years, in real terms, thanks to rising interest rates.

Many analysts are expecting the RBA to raise interest rates as early as June, holding off until after the federal election campaign.

“The RBA would only (move in May) if they felt an urgent need to hike rates,” AMP Capital chief economist Shane Oliver told news.com.au, adding inflation data released at the end of this month would have to be quite high for this to happen.

Once interest rates begin rising this would likely send house prices lower as mortgage repayments would increase.

Some have estimated that if the discount variable mortgage rate was to rise by 2.15 per cent to 5.60 per cent, as predicted by the market, then mortgage repayments would lift by 29 per cent from their current level.

This would see monthly mortgage repayments on the median priced Australian home rise from $2599 in February 2022 to $3344 – an increase of $744.

Despite this, Mr Moore said it was possible property prices could grow again later in the year.

“It depends on how the economy evolves and what the rates do,” he said.

House prices are still rising slowly in some areas. Picture: NCA NewsWire / David Swift

If the economy is doing well and unemployment remains low, while wages increase, Mr Moore said this would make buyers more confident.

However, the RBA could also decide to raise interest rates further if inflation was rising too quickly due to the positive conditions, with Mr Moore describing the situation as a balancing act.

Mr Moore also pointed out the growth in property prices was happening at a slow pace at the moment, which made it unlikely there would be a sudden change.

“We’re likely to see prices remain flat or decline, or grow very slowly over the next few months.”

“It also won’t be uniform across the country. Prices in places like Adelaide and Brisbane are growing more quickly than in Melbourne and Sydney, and we’d expect that to continue for the next little while.”

Mr Moore said large falls in house prices usually happened during recessions, pointing to the crash experienced in the United States after the global financial crisis in 2008.

“I’m not expecting to see a recession this year or next so I don’t think we’ll see big price falls like what happened in the US in 2008.”