Think property prices will dip when rates rise? Don’t bet the house on it

When interest rates increase, many Australians and prospective buyers worry that property prices will fall. It’s a common assumption: higher borrowing costs mean fewer buyers and lower prices. But the reality is more complex—and often more optimistic for sellers and investors.

In this post, we’ll explore whether rising interest rates truly lead to property price dips across Australia. We’ll look at historical patterns, market dynamics, and expert insights to provide a balanced picture.

Understanding the link between interest rates and property prices

Interest rates are the cost of borrowing money. When the Reserve Bank of Australia (RBA) raises the cash rate, lenders usually increase their mortgage rates—that’s what homebuyers pay monthly.

Logical assumption: higher mortgage costs mean fewer people can afford to buy, which should reduce demand and push prices down. However, several factors influence this relationship.

Real estate is more than just interest rates

• Property prices are driven by supply and demand. If more people want to buy—due to strong employment, population growth, or investor activity—prices may stay stable or even increase despite higher rates.
• Lending criteria matter. Lenders tighten their rules when rates rise. This impacts who can qualify for loans, possibly reducing demand among less-qualified buyers.
• Market expectations matter. If buyers believe that rate hikes are temporary, they may continue to purchase properties, expecting prices to hold or grow.

Historical patterns: Do prices fall after rate hikes?

Looking back at Australia’s recent history offers valuable insights:

The 2010-2011 rate hike cycle

• The RBA increased rates from 4.75% to 4.75% between late 2010 and late 2011.
• Despite these rises, property prices continued rising—by about 5-7% across major cities.
• Strong population growth, low unemployment, and investor confidence kept demand high.

The 2015-2016 cycle

• Rates increased gradually from 2.0% to 2.75%.
• Again, prices didn’t fall. They remained steady or grew slightly, especially in pockets of high demand like Sydney and Melbourne.

The recent 2022-2024 period

• The RBA raised rates from 0.1% to over 4%.
• During this time, some markets experienced minor softening, but overall prices stayed resilient.
• Why? Continued immigration, record-low unemployment, and a limited supply of new homes.

The takeaway: Rising interest rates alone do not guarantee a price dip. Market fundamentals, employment levels, and supply constraints often outweigh borrowing costs.

Why might property prices remain stable or rise?

Strong housing demand

• Australia’s population growth remains robust, driven by international migration.
• Many Australians see property as a safe investment, holding onto their assets or still upgrading.

Limited supply

• Building delays, planning restrictions, and land shortages mean fewer new homes.
• Limited supply keeps prices high, even when borrowing costs increase.

Investor activity

• Investors continue to buy properties, especially in growth regions.
• Rented property demand supports steady prices.

Market expectations and resilience

• Buyers often assume rate hikes are temporary.
• Many purchase with fixed-rate loans or plan to ride out cyclical fluctuations.

The role of mortgage types and borrower profiles

Fixed vs. variable rates

• Many borrowers lock in fixed-interest loans before rates rise.
• Fixed-rate loans shield owners from immediate rate hikes, helping maintain demand.

First-time buyers and investors

• First-timers often rely on government incentives, making them less sensitive to rate increases.
• Investors view property as long-term wealth, willing to withstand rate fluctuations.

Documentation and eligibility

• Eligibility depends on income, savings, credit history, and visa status.
• Proof of income can be from Australian or overseas sources, with proper documentation.
• Deposits typically come from savings, gifts, or overseas accounts, and lenders may require a minimum of 5-20%.

What about loan-to-value ratios (LVR) and Lenders Mortgage Insurance (LMI)?

• Lenders usually approve LVRs up to 80%, but for higher ratios, LMI adds protection for lenders.
• If you’re a first-time buyer with a 10-20% deposit, you’ll likely pay LMI unless you can negotiate a lower ratio.
• Fixed-rate and variable-rate loans impact repayment amounts but do not affect the underlying property value.

Expert insight: It's not just about rates

French economist and financial analyst, Gilles Duranton, notes: “Interest rates are one of many levers influencing real estate markets. Strong employment and immigration can offset rate hikes’ dampening effect.”

In my 20+ years helping migrants and expatriates secure Australian mortgages, I’ve observed that strict demand and supply factors often dominate.

Practical advice for prospective buyers

• Don't assume prices will fall immediately after rate hikes. Market fundamentals matter more.
• Prepare your documentation early. Clean financial records and verification streamline approvals.
• Understand your borrowing capacity. Consult brokers or lenders to see how rate increases affect your loan.
• Consider fixed-rate loans if you want payment certainty during volatile periods.
• Stay aware of government incentives, such as first-home buyer grants, which can provide a buffer.

Final thoughts

While rising interest rates can slow property price growth or cause minor dips, they rarely lead to dramatic declines in Australia’s resilient markets. Demand factors like population growth, limited supply, and investor confidence often sustain prices.

As always, whether you’re a first-time buyer or seasoned investor, understanding market dynamics ensures you make informed decisions. Don’t rely solely on interest rate trends; consider the broader economic picture and seek trusted advice.

Remember: Property remains a long-term investment. Short-term fluctuations are normal, but fundamentals tend to keep the Australian market steady.

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Sources:

• Reserve Bank of Australia (RBA)
• Australian Securities & Investments Commission (ASIC)
• Foreign Investment Review Board (FIRB)
• CoreLogic Property Data