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How an interest rate rise impact the apartment market?

How an interest rate rise impact the apartment market?

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There has been some recent commentary about the potential for interest rates to rise over the next one or two years. This is a normal consequence of strong fiscal stimulus implemented by many governments during Covid including Australia.  There is some interesting reading from experts on this topic here and here and here.

Assuming the forecast of a rise in interest rates is correct, the impact on the property market and specifically apartments will be interesting. A recent article set out the five factors impacting property prices. In summary they are;

    1. Interest rates
    2. The availability of credit
    3. Job security
    4. The household balance sheet
    5. Supply.

The current cash rate as set by Australia’s central bank (the RBA), is at a record low of 0.10%. Westpac chief economist Bill Evans tips this rate to reach 1.25% by 2024 and Tapas Strickland, head of economics at NAB suggest it will rise to between 1.75% and 2.0%. The current average residential borrowing rate is 3.03% so if we assume there will be a 1.5% rise in the cash rate (and this is passed on to borrowers in full) lending rates will increase to 4.53% which is close to a 50% increase in borrowing costs.

An interest rate rise may temper the property market generally, but it will also encourage buyers to look at cheaper property such as apartments to better match their debt servicing capacity. This suggests a rise in interest rates would direct more buyers towards the apartment market especially given the value gap that has opened up recently between apartments and houses.

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