What Rising Interest Rates Mean for Falling House Prices – Cathy Houston


With the Reserve Bank of Australia (RBA) raising the cash rate this month for the first time in 11 years and inflation marking its highest level since the introduction of the GST in the early 2000s, everyone talks about falling real estate prices.

CoreLogic reports that house prices fell in Sydney and Melbourne in March by -0.2% and -0.1% respectively. The RBA noted in its Financial Stability Review that a two percentage point rise in interest rates could cause real house prices to fall by 15%.1

For many, this is a very daunting prospect, but I want to highlight four points to put it into perspective:

    1. Real estate cycles are normal and we’ve survived real estate downturns before
    2. Government policies help homeowners cope with rising interest rates
    3. The borders are opening
    4. A good quality property will weather the storm.

Lessons from past housing market downturns

When I think of previous downturns in the housing market, I feel like Australia got off pretty lightly during the global financial crisis (GFC) and the last really big downturn in my memory followed the crash of 1989 and the subsequent recession.

Data from CoreLogic shows that the deepest downturn in the past 40 years for Sydney and Melbourne followed the peak of 2017. During this period, house prices fell by 15% and 11% for Sydney and Melbourne respectively before rebounding to exceed their peak levels in three years.

This contrasts with the recession after 1989 where prices fell only 9.8% and 9.9% in Sydney and Melbourne. Notice that it then took five years for Sydney and eight years for Melbourne to fully recover their values, as this was during a larger economy-wide recession.

The following table summarizes CoreLogic data2 showing the largest declines and longest recovery periods over the past 40 years. Note that for Brisbane and Adelaide, the downturn that produced both the biggest drop and the longest recovery period was one in the same.

Data from CoreLogic

The main lessons from this data are:

  • the speed of the recovery depending on the health of the rest of the economy; and
  • there has not been a 15%+ decline in statewide values ​​in the east coast states in 40 years.

The Significance of Our National $8 Trillion Election Year Obsession

Residential real estate is a national obsession. CoreLogic estimates that the value of our housing market is now over $8 trillion. To provide some context, this is four times the value of Australia’s gross domestic product (GDP) and $1 trillion more than the combined value of the ASX, pensions and commercial property stock.

Growth in housing market value comes from new construction and price growth over time. This increase in value was not funded by wage growth or inflation, but rather by increased household debt at historically low interest rates.

Signs of rising rates are on the cards

The government, the RBA and the Australian Prudential Regulation Authority (APRA) have forecast the rise in interest rates.

For some time, APRA has required banks to ensure that their home borrowers can afford interest rate increases of up to 3%.3

The RBA has monitored the extent to which the amounts owners have in their clearing accounts would cushion the impact of an interest rate hike. They noted in their April 2022 Financial Stability Review that a 2% rate increase would reduce the cushion from 21 months to 19 months.

The government is very aware of the impact of rising interest rates on the market and both major parties have introduced new policies as part of the 2022 federal election campaign to help cushion the impact. for existing and new home buyers.

Government support is nothing new. One of the reasons why the downturn in the residential housing market in 2017 had a shorter recovery time was due to government initiatives, as well as lower interest rates and the relaxation of APRA regulations. .

The effect of emigration

The effect of immigration on house prices depends on how quickly consumption increases.

AMP chief economist Shane Oliver has estimated that if the ‘Big Australia’ policy is implemented and there are 250,000 immigrants by 2023, it will cause oil prices to rise. real estate by 5% and an increase in rents by 7%.

Flight to quality – why values ​​are not limited to macroeconomics

Property values ​​are not only determined by macroeconomic factors, such as interest rates, inflation and immigration.

Some properties will perform better than average due to specific property characteristics.

Can you walk to stores, schools, parks? Do you have a view of the harbor or a cemetery? Has the house been taken down or has it been recently remodeled with the latest backyard renovation. Do you have a block of apartments overlooking your pool or are you surrounded by a national park?

When I bought my current family home, I bought because the values ​​were going down. But I didn’t care. I was buying for my rapidly growing family in a suburb where my children could play in the local parks, we could take bush walks and walk to cafes and supermarkets. I could easily get to town. The house had a large backyard and good living areas. We have been here for 17 years.

The Importance of Quality in Investing

As Managing Director of MA Financial Group’s mortgage team, I make decisions every day about the quality of the real estate assets against which we will lend.

I look at the features or quality of the property that will make it attractive to buyers throughout the cycle. Is the property well located, close to local amenities? Is there a demand there for this type of property? Is the property well appointed and habitable? This is especially important for apartments. Many people leave their large family home for an apartment. Where will they put golf clubs, camping gear and their bikes? Is this a place where I could live?

The difference between a standard commoditized residential house or apartment and one with something special is that the commoditized product will move with market and macroeconomic forces.

Properties with something special will be the ones that home seekers will fall in love with and have to own.

This does not mean that the prices of “good” quality properties will not go down. But as markets soften, buyers will focus on the quality of both the location and the property itself. As one of my colleagues often says “there are always good deals to be had in bad markets and bad deals to be had in good markets”. It’s about knowing how to choose the right ones.

A mortgage lender’s perspective

When making decisions as the manager of our mortgage funds that effectively fund lending, I carefully consider the ratio of the loan to the underlying property value, taking into account the potential for deterioration in the value of each security property over the life of the loan. The lower this ratio, the more protection there is against market value fluctuations.

For example, a loan with a loan-to-value ratio of 64% could still be repaid through the sale of the property, even after a 36% decline in value, more than twice the largest price drop in Sydney on the last 40 years.

I am also reassured by the fact that the fall in real estate values ​​has always taken a long time to occur, generally around two years to reach the bottom of the cycle. We therefore seek to actively manage loans exposed to properties whose values ​​fall below pre-agreed levels, either through repayment or the sale of the property, well before the buffer enters the value of the property and the loan is exhausted.

Access real estate exposure with a focus on capital preservation

There are a growing number of borrowers seeking mortgages from lenders outside of the big banks. The MA Secured Real Estate Income Fund capitalizes on this growing segment of the market and uses investor capital to selectively lend money to borrowers for financing Australian residential and commercial properties.


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