Rising interest rates on home loans may finally be slowing property prices

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After experiencing a mind-blowing boom last year, Australian property prices have finally started to pace themselves. 

According to a new Corelogic report, housing markets lost significant steam throughout the month of May, with growth dipping as much as -1.0% in Sydney and -0.7% in Melbourne. 

While regional property continued its gradual climb, it wasn’t enough to offset falls in the capital cities, which brought the overall national index down -0.3%.

These price drops may seem tiny to first home buyers, especially those already grappling with steep interest rate hikes on home loans. However, a slowdown could potentially benefit people hoping to break into the property market for the first time. 

Let’s unpack where the latest figures may take us, and what they mean for hopeful home-owners.

Sydney, Melbourne, and Canberra property prices lag as demand decreases

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Sydney’s property prices have always been…special, to say the least, remaining stubbornly sky-high through a global pandemic and an affordability crisis. 

However, despite advertising 5% more listings than last year, Sydney auction sales rates have slowed significantly in the last few months. Other hot capitals, including Melbourne and Canberra, showed similarly alarming downward trends, indicating disinterested (or disheartened) buyer sentiment in places where competition is normally fierce. 

The likely culprit? The Reserve Bank’s decision to raise the cash rate, since lenders were swift to pass along last month’s 0.25% rate hike to variable loans. 

However, Corelogic’s research director Tim Lawless explains that the May rate hike is only one factor of many dragging down price growth. 

“Housing market conditions have been weakening over the past year, at least at a macro level,” Lawless notes. “Since then, housing has been getting more unaffordable, savings have reduced, and lending conditions have tightened.”

RELATED: Handling RBA rate talk: Are interest rate increases something to worry about?

So despite stock levels theoretically improving supply-driven demand, runaway inflation and hefty debts seem to have dampened buyer spirits. Now, sellers may find themselves settling for less impressive sales prices if they want to sell at all.

However, tougher selling conditions actually put buyers back in the driver’s seat. Instead of buyers competing for a property, properties must now compete for buyers. Those trying to break into the market might actually have more leverage than they think.

Despite property price drag, rental market still flash hot

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Alas, the new isn’t so good for renters. While dwelling values may have dropped by -1% in some cities, national rents increased overall by the same amount in May.

This takes the quarterly rental growth rate up to 3% – nearly two thirds of a percent worse than last year. As international arrivals jack up the demand, rent will likely climb higher well into 2023. 

An overheating rental market isn’t great for would-be borrowers long-term, either, as eye-watering bills make saving for a deposit much harder. (In fact, making renting more attractive may actually be key to solving housing affordability).

However, Lawless predicts that as the unemployment rate drops, we may see wage increases in the near future. 

“As income growth outpaces housing values, the home deposit hurdle will gradually lessen,” he says, “reducing one of the key barriers to entry for home buyers.”

Looming RBA rate hikes will continue to affect property prices

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With inflation continuing to wreak havoc on the economy, we’ll likely see many more RBA rate hikes over the next year, further pushing down property prices long-term. 

In fact, the cost of housing finance has been a critical factor in all 14 booms and busts in the last thirty years

While the cash rate currently rests at 0.85%, according to the RBA’s May decision statement, “it’s not unreasonable to expect that interest rates would get back to 2.5.” 

Such a number would put this year’s final cash rate on par with pre-pandemic levels – and over 200 basis points higher than its starting point. 

RELATED: How to manage higher mortgage repayments

Cheaper property prices may at least be a silver lining for hopeful buyers comparing home loans on offer.

“As mortgage rates trend higher,” Lawless explains, “we are likely to see falls in housing values become more widespread.” 

This will ultimately make tracking the RBA key to navigating the property market – and predicting further price falls. 

RELATED: Home loan rate check: How do ANZ, CBA, NAB and Westpac compare?

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