Good news and bad news can sometimes go hand in hand, as is the case with the lower home loan interest rates Australia is currently experiencing. While lower interest rates can make buying your first home – or next, bigger home – more affordable thanks to lower repayments, they can also drive up property prices by tempting more people into the market.
And that’s exactly what is happening at the moment. Most experts agree that lower interest rates generally encourage more people to enter the property market, as a result driving up property prices.
The numbers seem to back up this theory. Data from RP Data-Rismark Home Value Index shows that property prices in Australia’s capital cities rose 3.8 percent in the 2012 to 2013 financial year, in stark contrast to the 3.6 percent fall in the previous financial year.
Darwin posted the strongest growth, with prices up 6.1 percent, with Perth close behind with a 6.0 percent increase in property prices. Sydney ranked third with a rise of 5.6 percent.
The cash rate is currently at 2.75 percent, a 53-year low after the last cut by the Reserve Bank of Australia in May. RateCity shows variable interest rates from 4.75 percent and fixed rates from as low as 4.39 percent for 1 year.
RP Data Product Manager Greg Dickason agrees that lower interest rates are driving up property prices, but says the impact is tenuous at the moment. “Low rates, coupled with the big four banks passing on in full interest rate reductions, are starting to have an impact on values,” he says. “This impact is fragile as evidenced by the recent negative quarter in the housing market. Year-on-year sales volumes however are up, which is positive for the market.”
Lower interest rates also tend to encourage more property investors to enter the game, with Australian Property Monitors noting increased activity by property investors in the first half of 2013.
Last year, Australian property investors borrowed $84 billion and accounted for 43 percent of all housing loans by banks in Australia. Investors in NSW account for nearly 40 percent of all residential property investment activity, compared to Victoria where investors account for 23 percent of residential investment.
Yellow Brick Road founder Mark Bouris has come out saying that falling interest rates will drive up property prices over the next five years, as more investors enter the game. Speaking on the Today TV program last month, Bouris said: “From now to maybe five years’ time, house prices will go up quite a lot and I think it’s a good time to take the opportunity to invest in real estate.”