Why House Prices are not Faithful in Their Relationship With Interest Rates

Buyers, Journal, Property Market, Sellers,  Buyers and sellers,  Principals,  Salespeople

Convention tells us that there is a traditional cosy relationship between interest rates and the price of residential property, particularly in these strange COVID times when house prices are booming on the back of record low rates. 

But residential prices are a fickle lover. Rather than staying in the embrace of one factor such as interest rates, house prices dance with several influences. Meet some of house prices’ lovers below. 

The Central Banker 

According to CoreLogic, national home values rose at the fastest rate in March since 1988 – at 2.8 per cent. Brisbane homes climbed 2.4 per cent while regional Queensland rose 2.3 per cent. Economists agree that this growth is being helped by record low interest rates – with the official cash rate set by Australia’s central bank, the Reserve Bank, at 0.1 percent to stimulate the economy during COVID. 

The Nomad 

While acknowledging the role of low interest rates in the residential marketplace, Westpac commentator and financial journalist Andrew Main notes data that shows 446,000 Australian ex-pats have returned home between March 2020 and January this year. He argues that enough of these returnees are buying into the residential market to influence prices. Property Investment Professionals of Australia (PIPA) agreed, saying the return of cashed-up expats was adding to “sky-high property sales”. 

The Homebody 

People living within Australia are also on the move. The ABS’s September quarter interstate migration figures revealed Queensland showed a net increase of 7,200 people moving to the state from elsewhere within Australia, the highest of any state or territory.  

This is in part driven by the new working from home phenomenon in the wake of COVID, as people who don’t have to commute daily to the office seek to embrace a regional lifestyle outside the major cities. Brisbane was the only capital city apart from Perth to buck this trend with a 3,200-net increase, perhaps attesting to its liveability. CoreLogic Head of Research Australia Eliza Owen says internal migration is benefitting Queensland residential markets compared to other areas of Australia. 

The Government Representative 

The influence of low interest rates has been helped by home buyers having access to temporary help from the Federal Government when building or buying a home during COVID. This was in addition to ongoing state and territory programs such as the Queensland’s Government’s $15,000 First Home Owners Grant. The Federal Government’s HomeBuilder Grant provided $25,000 for people building or buying a new home. This dropped to $15,000 in January and new applications wound up from 14th April.  

Power of Property property strategist Michael Lawton argues that such schemes tend to encourage people to bring forward their property purchases – creating a temporary rise in demand and therefore higher home prices – followed by a slump when the effects of the grant end. 

The Keen Buyer 

Despite people being enticed to buy or build new homes through government incentives, CoreLogic’s April home value report says that total national advertised residential listings were extremely low in March. But this wasn’t due to low numbers of homes being put on the market. It was simply because the demand of buyers was outstripping the number of new listings coming online. This has put rising pressure on house prices. 

This squeeze is also affecting house and unit rents, with CoreLogic finding prices rising in many capital cities – including Brisbane with a 1.1 per cent rise over the year to March. 

The Scared Suitor 

CoreLogic Research Director Tim Lawless says the rapid turnover of property has created a sense of FOMO (fear of missing out) among buyers. In fact, general thinking among commentators is that people are trying to get into the market while interest rates are low and before prices get too high – creating a chicken and egg situation. 

Complex Dance Instead? 

REIQ CEO Antonia Mercorella says that rather than house prices being unfaithful to low interest ratesthe real relationship between interest rates and residential property prices could be seen as a dance between all the players at once. 

“Factors such as interest rates, government incentives and population trends are all in a complex dance with house prices at the same time,” she said. “Ultimately, these factors all combine together to exert their influence on which way prices will go – whether updown or stable.”