What do the interest rate rises mean to the property markets?

On Tuesday the Reserve Bank of Australia (RBA) lifted official interest rates for the first time since March 2008, which has left many people asking…

Where are mortgage rates headed and what will happen to property prices?

If you can remember back to 2007 (it’s not that long ago, but boy has a lot happened since then) the RBA governor Glenn Stevens increased interest rates at the time in an effort to ward off inflation caused by an economy in overdrive.

Now, thanks to historically low interest rates, the Government’s huge spending spree and China’s rebounding economy, our economy is on the move again, so it’s time once again to raise interest rates from their historically low stimulus levels back to “normal” levels, which means rates will rise around 2% over the next year or two.

The next rise will most likely occur in November, on Melbourne Cup Day, and then the RBA will most likely sit back and see what happens over the Christmas break and hike rates again next February.

How high will rates rise?

Well what we have learned from the financial crisis of the last few years is that economists are notoriously bad at predictions, but currently the markets have factored in rate rises of about 2% by the end of 2010. That should bring them back to neutral levels, which means they won’t be stimulatory, yet won’t be high enough to stifle demand.

But looking further ahead, as the property and the economic cycles move on, once again the RBA will have to step in and lift interest rates to restrain the next boom that will inevitably come.

So back to my original question – what will the rising interest rates do the property markets?

Firstly, it may make some first home buyers stop and think. That’s exactly what the rate rise was designed to do – stop property buyers over committing to big loans at today’s unsustainably low interest rates.

But in general the next few interest rate rises won’t put a dent in our strong capital city property markets.

Interest rates were expected to increase, albeit in a month or two, and the strong and rising confidence in the economy and the real estate market will override any concerns about where rates are headed. It’s unlikely to see an interest rate led slowing in property markets for some time. In fact, many investors are looking to lock in purchases before rates, and property prices, go even higher.

And the underlying fundamentals suggest property prices will go higher. Let’s just have a quick look at these to reassure ourselves:

1. Currently we are experiencing population boom fuelled by rising immigration and a baby boom. At the same time…
2. Demographics are changing and we live in smaller household, which means we need more dwellings for the same number of people. However we have a …
3. Shortage of housing, as builders have stopped building, meaning…
4. Vacancy rates are low and rents are rising, and…
5. The cost of new construction is rising.

Putting all this together means it will take more than one or two interest rate increases to restrain our property markets.

Michael Yardney is the director of Metropole Property Strategists, a best selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.