How interest rates affect property values
Residential
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Residential
Here’s how interest rates affect property values:
Read more: Timing your home sale: An expert guide
Most people think of interest rates in terms of their effect on a single person. Higher interest rates make your mortgage more expensive to service. Low interest rates do the opposite. The same is true for any potential purchaser of your home. People like to buy during a low interest environment, because their loans won’t be as expensive.
Lower rates make property cheaper to buy, while higher rates make them more expensive. More people are able to purchase property, meaning you have more buyers, which flows into a higher price for your individual property.
However, it doesn’t stop at the single person. Lower interest rates make property cheaper to buy, but they also make them attractive investments in comparison to other asset classes. Because they are so cheap to service, lots of people are able to buy their first home or, as in recent years, purchase an investment property. That pushes the demand for property above the reach of supply, increasing the price of your property for sale.
But because interest rates are so low, people are still able to invest in property despite the rate rises. In other words, lower rates make property investment more popular, increasing house prices as a whole.
Let’s go deeper still. So many people are borrowing cash to buy property due to low interest rates, their lender might start running out of money to lend. While the interbank exchange rate is also low i.e. the official cash rate, their costs are low. So servicing all those extra mortgages isn’t too difficult.
But as more and more people borrow more and more to afford the higher house prices, the banks might need to start taking offshore money to keep those mortgages going. It’s all still supply and demand, but rather than direct property demand, it’s demand for capital. The same rules apply; supply has to meet demand, or else prices go up. Put shortly, low interest rates cause a surge in demand for capital, which banks have to stretch themselves to meet.
Eventually, even the taps of offshore cash might run out, and because so many people are preferring to sink their money into property rather than term deposits (which the banks draw on to finance their lending), the banks have to start raising their interest rates. That brings in more money for them to lend, but also makes mortgages harder to service and people stop taking on so much, so fast.
Demand drops down, allowing supply for capital to come back up. Because of the drop in mortgages being lent out, property sales start petering out as people can’t afford the high prices. Sellers drop their asking prices to meet the less-frenetic market, and property prices drop. In other words, once the capital from the banks runs out, they raise interest rates, which makes mortgages more expensive, which in turn makes property more expensive.
To summarise all of that, the higher the interest rate, the lower the property prices.
What this all means for you is that during a low-interest environment, your property is likely to be extremely valuable. But if the capital for the banks runs out, those interest rates start to tick upwards—something that is already predicted to happen by the Treasury.
If you want to make the most of your property sale, one of the factors you need to consider is the current interest rates. Low interest rates (such as they are currently) are likely to push up your sale price, but you might find that such an environment doesn’t last forever. As with all investments, there are windows of opportunity to take advantage of.
In summary, interest rates do more than just drive up the price of your mortgage. They affect the entire property market; as they rise, prices drop, as they fall, prices get pumped up. We are currently in a low-interest environment, so prices are high—but the Treasury doesn’t think this is going to last forever.
Is it time for you to take advantage of the current high prices?
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