The many factors that influence property prices
Many commentators expect the Reserve Bank of Australia to start lowering the cash rate soon, which has led some people to assume that buyer demand, and therefore property prices, will inevitably rise. However, interest rates are far from the only thing that influence prices, according to one of Australia's leading housing economists.
Ray White Group Chief Economist Nerida Conisbee said it was true that property prices were “highly correlated with interest rates at a national level”, because as borrowing costs rose, people were able to borrow less. However, the link between rates and prices weakened once you zoomed in from the national level, she added.
“Overall, Sydney and Melbourne are the most sensitive to interest rate changes primarily because of high debt levels. In more affordable locations, the link is a lot weaker. And in markets like Perth and Darwin, commodity cycles can have a much bigger impact,” she said.
Ms Conisbee said the number of properties listed for sale was another factor that influenced prices, given the link between supply and demand. For the same reason, housing supply also played a role.
“If population growth is occurring but housing supply is constrained, house price growth (and rental growth) will occur due to the shortage,” she said. “Right now, we are in an environment of constrained housing supply due to rising construction costs and this is likely to be a key factor in keeping house prices high despite a rising interest rate environment.”
Ms Conisbee said population growth also shaped property prices. “More people need more housing and population growth unsurprisingly results in house price rises,” she said. “The impact of strong population growth has also been seen since the end of the pandemic when prices grew, despite interest rates rising rapidly.”
Lending conditions, construction costs and more
Ms Conisbee said lending conditions were another key factor to consider. “Restrictions to finance slow down property markets, as can less competition between banks,” she said. “More competition can lead to more loans being written and pressure on pricing.”
Construction costs also played a role, according to Ms Conisbee. “Although it is now starting to be resolved, it remains a lot more expensive to build a new home now compared to pre-pandemic. This gap between the cost of building a new home and buying an existing one has been a driver of price growth over the past two years,” she said.
Ms Conisbee said the state of the economy was another factor that influenced demand, given its link to buyer confidence.
Government taxation and housing policies (such as first home owner grants) could also influence buyer demand, and therefore prices, according to Ms Conisbee.
Ms Conisbee said urban regeneration also affected property prices, albeit over a prolonged period. “Within large cities, this generally happens when older people move out of a suburb and young people move in their place. It can also be driven by more subtle drivers such as a renewed retail precinct or traffic calming within a neighbourhood,” she said.
Ms Conisbee’s list of factors that impact house prices is:
- Interest rates
- The number of properties for sale
- Access to finance
- Economic growth
- Population growth
- Construction costs
- Housing supply
- Sentiment towards property
- Taxation
- Urban regeneration
- Demographic change
- Infrastructure improvements
- Government policy
- Performance of other investment types.
How to compare home loans
The key takeaway is that while interest rates matter, they’re not the be all and end all when it comes to property prices.
Similarly, interest rates are just one factor to consider when comparing home loans. Borrowing power, chance of approval, loan features and fees are also very important.
As your broker, I’ll consider a diverse range of criteria to find a solution tailored for your personal circumstances.