How do interest rates affect the property market?

Cartoon model house with up arrows.

Interest rates and property prices are closely related. This is because the cost of financing a home loan greatly impacts whether people can afford to buy property: more buyers, more competition, which means higher prices. While the Australian property market can be hard to predict, watching interest rates can give us a good idea of where it may be going. 

Whenever the economy is out of balance, whether it's a recession or period of high inflation, the Reserve Bank of Australia (RBA) will adjust its monetary policy by either raising or lowering the official cash rate. This simple tool creates ripple effects on interest rates for home loans, since lenders use the cash rate as a guide.

Since inflation has been much too high recently, the RBA pumped the brakes by hiking the official cash rate 400 basis points over the last year, bringing it up to 4.10%. As a result, property prices fell over 8% last year as buyer interest in the market evaporated.

While property prices have seen a miniature resurgence in the first half of 2023, this may not be sustainable. So let's fully unpack the relationship between official interest rates and property prices.

Higher interest rates usually mean lower property prices

House balanced on a seesaw against stacks of gold coins

Almost no one expected the official cash rate to fly as fast and as high as it has gone in the last year. In May 2022, the RBA began raising interest rates and has done so at an aggressive page. Now at 4.10%, the cash rate is in deeply contractionary territory, meaning high interest rates should reduce household spending and shrink growth in the economy soon – thus slowing inflation.

To give you an idea of how much rate hikes can add to the cost of a mortgage, in June 2022, variable interest rates for owner-occupier home loans sat at an average of 3.61% in Mozo's database. After a year of RBA rate hikes, the average variable mortgage is now 6.58%. According to Mozo's rate change calculator, a jump of 3% on a $500,000 loan with a 25 year term (from 5% to 8%) adds over $930 to a borrower's monthly repayments. 

Thanks to the RBA's efforts, property prices fell 8% last year while rental prices skyrocketed, mostly due to increased demand and landlords passing along mortgage hikes to tenants. A lot of the decline in home values came down to buyers no longer being able to afford the market – especially first home buyers, who often face the greatest cost barriers.

RELATED: When will interest rates come down

In recent months the housing market has seen a little upswing in prices, but this is largely due to overseas investors and cashed up renters, two groups that aren't likely to struggle with rate hikes.

However, with the peak of the cash rate still yet to come, cost pressure will mount on homeowners. Already, there are reports of 'distressed sales', or Aussies selling their properties because they can no longer afford their mortgage.

As the cash rate continues to rise, variable mortgage rates will trend higher and reduce buyers’ borrowing capacity and make serviceability tests harder to pass. This in turn will flow-on to the house prices, as demand drops and price tags follow suit.

Given property prices soared to record-shattering heights during the 2021 property boom, price drops may be a welcome relief to hopeful first-time buyers who can still service a high-interest mortgage.

However, those who already have a home may fear a loss of home equity, which could reduce their LVR and make it harder to refinance. Many more will just face regular ol' mortgage stress as repayments become harder to meet.

So what can homeowners do to help manage the increasing home loan costs?

Loan details

Rate change

Repayment change if rates go up

In an era of high interest rates, comparing home loans is key for first home buyers

Person holds piggy bank

The housing market can be unpredictable and complicated. However, interest rates can still give us an idea of property predictions for 2023, including how homeowners and homebuyers can manage costs. 

Some strategies you could use to keep costs down include:

  • Save for a bigger deposit. The size of your deposit can determine how much you pay for your home loan in the long run. Not only does it establish your loan-to-value ratio, it sets which interest rates you're eligible. The lower the LVR, the lower the interest rate. Luckily, a rise in the cash rate also makes savings accounts and term deposits more attractive, since those interest rates are pegged to the cash rate as well. Watch your spending and try to aim for at least a 20% deposit. (Anything lower, and you may have to pay Lenders Mortgage Insurance). 
  • Consolidate as much debt as possible. Not only will this get your finances in order, but a lack of debt makes home loan applications deeply attractive to lenders. Even HECS debt can come back to haunt you if you’re not careful. (Fun bonus, though: your shares can make your home loan application look divine). 
  • Refinance your existing home loan. While refinancing sounds scary, it could actually save you a ton of money long-term. Multiple lenders are currently offering cashback to refinance your home loan, so talk to a financial planner to see if refinancing could be right for you.
  • Use your home equity to your advantage. While falling prices have got many homeowners nervous about their home equity, you could actually make your equity work for you, sometimes even to nab a cheaper mortgage. Huzzah!
  • Compare and research the market. Variable rates likely still have further to go, but some lenders offer special discounts to eligible customers, like on CommBank’s new green home loan offer. It’s all about comparing what’s out there to find something that could work best for you.
  • Research other avenues into the property market. Methods like off-market purchasing can sometimes be more expensive, but they can open you up to new opportunities and skirt the stress of the auction process. Otherwise, considers these three methods for buying property if money is tight.  
  • Get government assistance. Eligible applicants in Australia could receive government help for buying a home, like cover for a deposit through the First Homeowners Grant
  • Investigate first home loans. Home loan packages for first time buyers sometimes come with special perks, such as low interest rates, no ongoing fees, and smaller first deposits.

Keen to break into the property market? Head over to our home loan comparison hub, or browse a selection of offers below.

Compare low interest rate home loans - last updated 9 December 2023

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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

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