Interest rate rises continue to be a headache for housing

With inflation remaining stubbornly high, the RBA increased rates by 0.25 per cent today. At this point, markets are pricing in a couple more increases however as we have seen in recent months, conditions can change quickly. And while monetary policy is not a mechanism to sort out the housing market, if we want everyone to have a roof over their heads, it would be a good idea for the increases to stop now.

As more countries head into recession, at this point, it does look like the RBA’s “narrow path” will get us through while taming inflation. In the meantime however, it is creating a headache for renters, buyers and new housing supply that is going to take many years to resolve. And every interest rate rise is extending that pain. Rents are rising at their most rapid rate ever recorded, housing approvals are now at their lowest level in more than a decade and this housing shortage pressure is now flowing through to house prices. Rising rates are part of the problem.

More negatively, the circular problem of higher rates leading to higher inflation is playing out in property markets. Investor activity is falling as a result of higher rates, meaning higher rents. Developers can’t get projects out of the ground - partly because of high interest rates but also high construction costs. Fewer homes and high population growth means higher rents. Rising rents means higher inflation which means higher interest rates which means even fewer investors and fewer homes.

Now prices are moving upwards. Although seemingly counterintuitive in a high interest rate environment, it is reflective of what is happening in the rental market. Population growth is strong and there are too few homes. Add to this however is that sellers are sitting on their hands. New listings are down over 20 per cent.

No property cycle is ever exactly the same and this time around, interest rate rises are making housing so much more expensive whether you want to buy, rent or build.

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Media contact
Nerida Conisbee
Ray White Group
Chief economist
nconisbee@raywhite.com
0439 395 102