Why Are Housing Values Increasing Despite Higher Interest Rates in Australia?

Low Supply Relative to Demand

One of the primary reasons for the rising housing values is the imbalance between supply and demand. In the June quarter, approximately 127,000 homes were purchased, but only about 125,000 new listings were added to the market for sale. This shortage of available properties fuels competition among buyers, driving up prices.

Tight Labour Market and Accumulated Savings

Tight labour market conditions and significant savings accumulated during the pandemic have broadly underpinned mortgage serviceability. Many households are in a better financial position, mitigating the need to sell even as interest rates rise. This financial resilience supports the stability of housing prices, as fewer distressed sales enter the market.

Construction Sector Constraints

The construction sector remains squeezed, struggling to deliver on a large backlog of dwellings. This bottleneck exacerbates the supply shortage, further propelling housing prices upward. Despite demand, the inability to quickly increase housing stock keeps the market tight.

Strong Population Growth

Australia’s robust population growth has increased demand for housing, both for purchase and rent. More people entering the housing market intensifies competition for available properties, contributing to higher prices.

Buyer Composition and Deposit Sizes

The composition of buyers may also play a role in propping up housing values. Higher deposit sizes indicate that the current buyer profile is less debt-dependent compared to when interest rates were at record lows. This financial strength among buyers supports sustained demand, even in a higher interest rate environment.

Variable Rate Mortgages and Rate Expectations

A predominance of variable rate mortgages in Australia means buyers may be factoring in a future reduction in the cash rate into their purchasing decisions. Many expect that they are buying around the peak of the rate cycle, with the anticipation that mortgage rates will trend lower over time. This optimism keeps demand buoyant despite current rate hikes.

Future Rate Increases and Market Impact

While these factors currently support rising housing values, a further rate increase could slow demand. Buyers might reassess their purchasing decisions if they believe interest rates have not yet peaked or will take longer to reduce. This could eventually lead to a stabilisation or even a decline in housing prices as the market adjusts to new rate expectations.