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How do interest rates affect property prices?

Discussion in 'Property Market Economics' started by Jimmeh, 5th Jan, 2017.

  1. Jimmeh

    Jimmeh Active Member

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    I've been reading about the likely correction of Melbourne and Sydney in the next few years. I know there's a bit of speculation here, but excuse my ignorance, I'm trying to understand how economics and the property market works.

    If interest rates go up and APRA tightens lending, wouldn't this affect the Australian property market as a whole? I can't see the median house price in Brisbane catching up to Melbourne just because of that.

    I know this is simplifying things drastically. This is where my assumptions come in.
    1. People unable to service debt begin to sell off. Reduction in value across the board.
    2. Borrowing capacity is limited, only people in a strong position can buy in mid/high end market. Lower priced suburbs/cities become more desirable and median in these areas are pushed up.
    Reports from GFC and how it impacted Sydney.
    upload_2017-1-5_22-36-35.png

    Perhaps one of you savvy investors that has been through a few downturns could educate me on how the market was affected?
     

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  2. Marg4000

    Marg4000 Well-Known Member

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    1. Most people manage the higher payments. Looking at housing as a whole, a high proportion is owned outright. Many more have been owned for years so a big dent in the mortgage. Many more purchased with a decent deposit due to upgrading. Only a few are forced to sell, usually those mortgaged to the hilt on relatively recent purchases.

    2. As borrowing is more expensive, buyers cannot afford to spend as much. This usually affects the more expensive housing more heavily, as investment slows and PPOR purchases are limited to what is affordable.

    Every downturn is different. I believe, from what I have seen, that employment is the key. So long as people keep their jobs they will pay their mortgage, even if other spending is reduced, which then contributes to the downturn. Even if the house is worth less that they owe, most will struggle through.

    Basically returns from investment will be lower as interest payments go higher. There are far more fixed loans now than in previous downturns, so the flow on effect of higher rates will be far more gradual.

    Many console themselves with the belief that rising house prices ALWAYS means rising rents. Sometimes, yes, but high unemployment impacts on what people can afford to pay for rent. Some move back home, some enter share arrangements, some choose cheaper or smaller places. It all boils down to supply and demand. Again, historically, the very high end of the market is most vulnerable.

    And even those forced to sell if they cannot afford the current mortgage will often buy again, but smaller or in a cheaper area.

    Don't be sidetracked by the references to Sydney and Melbourne. They are the two biggest cities in Australia and therefore the focus of interest. Other cities and towns will be affected too. Personally I believe Sydney and Melbourne will possibly fare somewhat better than other cities as they have a much larger population and employment base to cushion any impact.

    Often the effect in a smaller town is far worse, particularly if a large employer closes down. You only have to look at the effect of the mining downturn in small towns such as Moranbah or Port Headland to see what can happen ....
    Marg
     
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  3. Befuddled

    Befuddled Well-Known Member

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    I believe there is a direct, inverse relationship between interest rates and property price growth.

    Came across an article from @petewargent's blog which then lead me to the RBA chart pack. The house price growth chart on pg 6 shows house price growth dipped into negative territory briefly around 2008 and 2011. Coincidentally, there were peaks in the cash rate around these times (pg 18).

    Obviously different markets perform differently but interest rates has a huge impact on sentiment and therefore overall market performance.
     
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  4. hammer

    hammer Well-Known Member

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    Wouldn't it depend by how much as well?

    Say it goes up to 5.5.....The results would be different than say it went up to 15.5???

    Anyone remember what happened in the late 80s?
     
  5. MTR

    MTR Well-Known Member Premium Member

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    Interest rates have already started rising, banks been pulling the trigger

    What happens if variable interest rate goes up? the opposite of when they down?

    When they go up it can impact on market conditions in a negative way, when they go down they can impact on property in a positive way which is what we have recently witnessed with recent boom cycles in Syd and Melb.

    Market sentiment is a big one that should not be ignored by investors just my opinion, what do I know;)
     
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  6. willair

    willair ...Boris Johnson For Prime Minister... Premium Member

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    The good part about this site is you can go back into the old site and track the year 2002 onwards by the interest rates ..Makes interesting reading when the rates started to climb and the personal circumstances and the ones that survive year after year market after market..
     
  7. Kangabanga

    Kangabanga Well-Known Member

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    This discussion of effect on interest rates feeds back into some discussions of credit availability, which i think is one of the top factors affecting property prices. Anything that affects credit availability will affect property prices.

    IMHO the dampening effect of higher rates will be widespread throughout australia. In fact, Syd/Melb investors might suddenly find the banks won't lend them as much for that next lower priced property in Brisbane or Hobart or Perth, causing them to hold back purchases.

    Of course other factors like economy/jobs are also important as evidenced by the crappy market in Perth caused by mining downturn and still going down despite the drop in interest rates past couple years.. But that feeds directly back to credit once again as the bank wont be too happy to extend credit to those who have become unemployed.
     
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  8. Marg4000

    Marg4000 Well-Known Member

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    For those of you too young to remember, the term "credit squeeze" used to be the generic term for times of limited lending. Self explanatory really.
    Marg
     
  9. Perthguy

    Perthguy Well-Known Member

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    Yes, I do remember what happened in the late 80's. Interest rates went up, house prices went up, interest rates rose higher, housing prices increased even more.

    This indicates the inverse relationship between house prices and interest rates does not hold true for all economic conditions.

    You have to look at the underlying economic fundamentals: unemployment, inflation and wage growth. In the late 80's inflation was out of control. Interest rates were increased to slow the economy. It didn't work. Interest rates had to get to 18% before the economy finally collapsed.

    Compare to now. Inflation is low, wage growth is low, the economy is limping into recession. In these economic conditions an interest rate increase probably would slow house price growth.
    Not if you control for inflation, wage growth and unemployment.

    Have a look at the late 80's where as interest rates went up house prices increased. Interest rates are set higher or lower depending on inflation and other economic factors. So they kind of happen after the house price has gone up or down.

    I think the primary indicators are inflation, unemployment and wage growth. I would rate interest rates as a secondary indicator.

    However, interest rates may be less important in a high inflation environment and may be more important in a low inflation environment. Further research needed to confirm
     
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  10. Beelzebub

    Beelzebub Well-Known Member

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    Just remember the reason why interest rates go up. The RBA is targeting inflation at 2-3% and they use monetary policy to control this. Essentially inflation tends to rise with wages growth and a strong economy.

    So usually if interest rates are rising it's a sign of good times in the wider economy. Wages and inflation as a whole should be rising and the RBA is raising rates to ensure that inflation doesn't get out of hand as a result.

    This dampens the impact rising interest rates might have on property prices. IMO rising rates will slow growth in the housing market or lead to stagnation but shouldn't cause a crash in Melb and Sydney.

    Rising rates could be an issue for markets such as SEQ and WA if rising rates are a result of good times down south and if those good times aren't had elsewhere. Monetary tends to be a catch all blunt instrument.

    But in saying that - stagflation (the counter intuitive coupling of high inflation and slow economic growth as happened in the 70s) is for me at least, the real fear. I believe that was caused by huge rises in the price of oil during the 70s.
     
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  11. MTR

    MTR Well-Known Member Premium Member

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    interest rates rises will trigger a slow down in property, this with credit squeeze will impact on serviceability, no loans no purchases.
     
  12. Cactus

    Cactus Well-Known Member

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    Great post.

    As inflation and property prices soared was there volume of sales? Could those struggling to meet the high interest rates offload at these inflated prices I.e still winners...
     
  13. Marg4000

    Marg4000 Well-Known Member

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    Most people who were forced to sell had high mortgages. Sure house prices rose too, but the loans grew quicker. Many sellers had negative equity and finished up owing money after the sale.
    Marg
     
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  14. Cactus

    Cactus Well-Known Member

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    How did the Principle on the loan rise?

    I mean if someone owned a property they had bought say preceding 2-3 years. If inflation so out of control then the property price must have far exceeded and precceeded the rate increases. If they just couldn't service at say 15% and sold at an increased price, I can't understand how they ended up owing more after sale....

    I can understand how someone who bought at high and then couldn't service and capitalised interest would bow out owing more, but would have thought this harder to happen because if you couldn't service at say 18% why did you buy at 14% 6-12 months earlier? Surely the trend was too scary to enter. If however you bought earlier in the trend then the benefits of inflation must have been felt.

    Forgive me I was but a weee lad when this occurred and only know of it from here say.
     
  15. Marg4000

    Marg4000 Well-Known Member

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    As I said earlier, the problem usually arose when people lost their jobs and could not make any payments. In those days interest rate rises were at least 1% and often 2% at a time. If you don't make any payments the loan increases rapidly. Added to which, even though house prices had risen generally, fewer people could afford to buy and in a forced sale the price often had to be discounted. Those who kept their jobs usually kept their homes.

    There were few fixed rate loans, usually from fringe lenders and at a very high rate, I.e, 12% when banks were 6% (around 1973 - my sister, but she had the last laugh as rates climbed above that figure).

    So you borrow at 6%. Six months later rates rise to 8% (yes, this happened to me while building our first home). Two or three years later it is 10-11% and rates climbed till the banks capped PPOR loans at 13.5%, but building society rates continued to climb until the talked about rates of 16% or 18% and sometimes higher. (1980s?)

    Then you lose your job, no savings as the mortgage increases had taken just about all you had.....

    If you want details, talk to anyone aged over 60.
    Marg
     
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  16. Perthguy

    Perthguy Well-Known Member

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    @Marg4000 @Cactus I think unemployment was quite high too, at least by the end. Also remember that wage growth was low, so while someone may have easily afforded repayments at 9%, by the time interest rates hit 18% they could no longer afford repayments because their salary had not increased much.
     
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  17. Whitecat

    Whitecat Well-Known Member

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    Good points.
    Interest rates going up is often associated with the economy going strong. More jobs more business profits and therefore more money and confidence to spend on housing. .
    Challenges are that interest rates are national and economies differ at the state level
     
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  18. Matt Ad

    Matt Ad Well-Known Member

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    How does the loan increase? there may be fees etc for defualting but the intial amount borrowed would not increase?


    I think the 80's were a fascinating time, I entered the market when rates were at 4% (and even less with some banks) so 18% really puts things in prospective, how many FHB out there haven't factored in rate rises? (beyond the banks assessment of a rise)
     
  19. Scott No Mates

    Scott No Mates Well-Known Member

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    For the majority of existing loans, the government intervened and capped them at 13.5% IIRC, for new loans there was no cap - similar to the current market.
     
  20. Marg4000

    Marg4000 Well-Known Member

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    Just about all loans back then were P&I so if you did not make the payment the interest was added to the amount outstanding, along with any fees. Loan amount increases.
    Marg
     
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