Despite rising interest rates, house prices are not crashing

 
There's a lot of doom and gloom about housing prices around the country with rising interest rates. Here, Lloyd Edge, property expert and founder of buyer’s agency Aus Property Professionals, talks about why he believes our property market is safe...as houses.

"The price of property should be as simple as the basic mathematics of demand and supply. When interest rates rise, affordability goes down, resulting in demand down, resulting in prices going down. But it isn’t really that simple. Yes, interest rates are rising but why aren’t we seeing this reflected in property prices crashing?

What we are seeing in the market is buyers wanting to “wait and see” for a better deal, especially after CoreLogic released figures on 3 October showing how the national average house prices fell for the third consecutive month in September. This national average is down 1.4 per cent and no surprises that Sydney and Brisbane were the capitals hit with the largest declines. However, if you are a buyer trying secure a property, how come you aren’t really seeing a price crash, and how come you still can’t grab a bargain?

We are seeing the current property market showing resilience much more than economists predicted as they had forecasted a 20% plunge. This is because it is really the high value houses that are being hit the hardest with the lower end of the market not seeing too much change. In this way, the higher value properties are absorbing the hit to the market. The reason for this being that the lower end of the market is still in high demand for first home buyers who are competing with investors for these lower value properties.

 

Source: CoreLogic

Borrowing capacity and serviceability.

The initial shock of rising interest rates and the potential for further rate hikes are being taken into consideration by lenders when borrowers are being assessed for their serviceability (the ability to pay back a loan). A borrower will typically be assessed at an interest rate which is 3% higher than the current interest rate to provide a buffer to ensure they are able to repay the loan.

When the borrowing capacity of a buyer falls, this will create more demand for properties at the lower end of the property market which is the on-flow effect of rising interest rates and the reason we aren’t seeing property prices crashing. So it isn’t good news for first home buyers, just yet.

An example of this is that year to September 2022, home prices at the top end of the market lost 3.8% of their value compared to properties in the cheapest 25% of the market which saw their prices 12.8% higher over the same comparable period.

The future for buyers.
Many are predicting no relief for buyers with more interest rate hikes likely to be on the table. It will come to a point where some first home buyers can no longer afford to enter the market, and this will bring the demand down for properties in the lower end of the market and this should bring some relief to those prices. Until then, we aren’t expecting a huge decline in prices at the lower end of the market.
Another constraint we are seeing is the cost of building and renovating is skyrocketing as materials are becoming costly which is bringing buyers who were planning to build or renovate into the property market to purchase an existing dwelling instead.

So, should you sit and wait? The best time to buy a property is when you can afford it. The banks will only lend you what they can foresee you will be able to repay and already take into consideration an additional 3% interest on top of the current rate. No one has a crystal ball, and let’s not forget many buyers did not want to purchase during the pandemic due to fear, and then they actually lost out when property prices increased. The cost of living is currently at a high, with the peak expected to be reached in the coming months. If we are able to receive a relief from inflation and the cost of living, we would also expect property prices to start increasing again next year and for it to be more affordable to build or renovate.

The current market is classed as a “buyers market” which means that buyers will have the upper hand when it comes to negotiations. It is certainly a good time to buy now as vendors are becoming more flexible with their price expectations and the contract negotiations in order to sell their property.

If you are looking to buy a property now but are worried about whether it is the right time, it is best to speak to a professional buyers agent to look at your individual circumstance and who can advise you on the right strategy to purchase your next property."

Photo: Andrew Mead/Unsplash