Will higher interest rates affect the housing market?

With another interest rate rise seemingly around the corner thanks to the high CPI reading for June, it is worthwhile looking back to see how interest rate rises over the recent past have affected the housing market.  The Reserve Bank started lifting interest rates back in October 2009; prior to that, the average standard variable mortgage rate was at a recent historic low of just 5.75%.  After seven rate hikes the average variable mortgage rate is now at 7.8% – unmoved since November last year and still well below the peaks seen back in July/August 2008 when the variable rate briefly hit 9.6%.

As mortgage rates started to rise from their historic lows back in October ’09 transaction volumes began falling away.  Of course other factors were also at play – first time buyers were winding out of the market as the Government stimulus was wound back and affordability constraints were starting to be felt due to dwelling values having risen by almost 10% since the start of 2009.  The primary driver of slowing transactions volumes was the expectation that mortgage rates were going to move higher faster.

The transaction volume graphs featured below highlight how buyer sentiment has slowed since October 2009.  The graphs were featured earlier this week by Robert Harley in the Australian Financial Review (‘Not the end of the world, yet’ – page 46 of AFR July 28).

The five year average trend line has been used to provide a benchmark of what might be considered ‘normal’ market conditions with regards to transaction levels.  Since interest rates started rising, transaction volumes have consistently been tracking below the five year average apart from a brief spike in the number of sales over March 2010.  At the national level, sales volumes in May were estimated to be tracking about 16 percent below the five year average.

Across the capital cities, the deviation from the five year mean is greatest in Brisbane where in May transaction volumes were recorded about one third lower than the normal.  Melbourne wasn’t far behind with transaction volumes tracking 29% lower than the five year average.  The only capital cities where transaction volumes are about on par with normal conditions are Sydney (+2.4%) and Canberra (+8.3% based on April estimates – May figures volumes are too early to estimate due to the small sample).   Adelaide volumes are tracking at 7.8% below the five year average, Perth volumes are 8.7% below, Darwin is 23% below and Hobart (based on April data) is running 10% below average.

With Australian consumers focusing on saving and paying down debt, the prospect of higher interest rates isn’t likely to see any marked improvement in transaction volumes until we start to see a material improvement in levels of consumer confidence.  Of course, the housing market is no longer high on the RBA’s list of priorities like it was back in 2009.

Inflation is firmly in the cross hairs and interest rates are likely to rise to the detriment of key sectors across the economy including retail markets, lifestyle and tourism and of course housing and finance.

About Tim Lawless

Tim heads up the RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia

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7 Responses to Will higher interest rates affect the housing market?

  1. Rallph July 29, 2011 at 1:36 pm #

    So are you pleading for some stimulus from the government?

    Funny that you can rejoice at double digit annual increases, but a fraction of a percentage fall is reason to fear that the world as we know it is going to end. It’s ok to book large profits on the back of the vagaries of the market, but it’s not ok to take losses by downward movements in the very same market.

    It almost sounds like you expect the housing market to behave like a magic pudding and for the government to come to the rescue when it appears that it might not be working out that way this time.

    • Tim Lawless July 29, 2011 at 2:56 pm #

      Rallph, we measure and report on the market based on what our analysis shows us, so no apologies for reporting that the capital city housing markets increased in value by more than 17% between January 2009 and June 2010 based on the RP Data Rismark Home Value Index. More recently I am sure you have noticed we are reporting that home values are down by 2.0% over the past twelve months to June and values are down by 2.7% over the first six month of the year (you can see our latest media release that was out today here). We report on the market in the same independent fashion whether values are going up down or sideways. I can only assume that you have misinterpreted our recent blog which provides (in my view at least) a decent summary of how transaction volumes have fallen away as interest rates have risen and may potentially fall further if interest rates rise again.

  2. Luke July 29, 2011 at 5:50 pm #

    Hi Tim, thanks for the top notch blog post, with top notch data. Quite a telling story. QLD volumes going forward is going to be interesting with the stamp duty hike effective next Monday. It’s possible QLD volumes spiked this July. Also, is RP Data currently having an issue with the total number of “On The Market” records available to RP subscribers? The numbers have risen significantly and continuously over the past couple of weeks (Aust wide) which is abnormal.

    • Tim Lawless July 29, 2011 at 8:46 pm #

      Hi Luke, I think almost without doubt we will see a surge in Queensland sales volumes during July as owner occupier buyers rush in to beat the stamp duty rise. That will likely be followed by the trend returning to where it was in May/June or potentially lower. The scrapping of the stamp duty concessions for owner occupier buyers at a time when the market was already depressed seems to be a desperate grab at more stamp duty revenue by the State Government which is likely to backfire by slowing down the market even further and adding to affordability constraints.
      With regards to the listing volumes, we use a different process to count listing volumes from an analytic perspective, but I will pass your query over to the RP Data support team to see if they can assist. Tim

  3. Gavin R. Putland August 2, 2011 at 11:43 am #

    Such glasnost with the data is impressive, commendable, and welcome. It would be even better if the timeline were extended back into the 80s, to let us see why we “had to have” that recession.

  4. Randy October 1, 2011 at 2:11 pm #

    Fascinating reading, Tim, it seems there is a big difference between the real estate markets of Australia and Canada…up here, for example, variable rate mortgages can currently be obtained at 2.4%, with fixed 5 year term rates at 3.06%……really enjoying your blog, very professionally put together….cheers from Canada!

  5. asxiq December 6, 2011 at 6:12 pm #

    9/12 months , stock markets had a negative returns when the interests were cut


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