How do interest rates affect housing prices?


Interest rates are affected by the cash rate set by the Reserve Bank of Australia (RBA) on the first Tuesday of every month (except January) for the following month. This action has a far-reaching effect on the whole economy, and particularly on property values across the country.

If there’s a change and your lender decides to pass that on to their variable-rate, borrowers home loan payments will also change. A lower interest rate will see you with more money in your pocket each month but a higher interest rate will see you with less.

How interest rates affect housing prices is one of those questions we often answer,’ said Ash Brown, Director of One Agency Orange. “It’s vital you understand what affect they have so you can have time buying or selling property to your best advantage.”

House prices vs interest rates

Generally, house prices fall when interest rates rise because the subsequent rise in mortgage payments reduces demand from buyers. People are less willing to begin a bigger mortgage, fewer people want to buy, and real estate prices either drop or simply stagnate until interest rates fall again.

When a drop in interest rates occurs and also a subsequent drop in mortgage payments, it often brings buyers to the market which causes property prices to rise. Buyers who have been waiting for a better interest rate can all show up at once and crowd you out at auctions and inspections.

If this drop brings you to the market as a buyer, be prepared to move fast before property values start rising or you may get priced out of the market. The best properties will sell quickly and become harder to find. 

Buyers and sellers

There are rules of thumb regarding the property market and interest rates, but they’re not absolute. Rising interest rates can actually be the perfect time to snap up a home even though the mortgage will be higher because that very factor will cause more properties to come on the market, putting downward pressure on prices.

“Contrary to what many people think, it’s often better to buy a house when interest rates are rising,” advises Ash. “Cooling the market can be the reason why the interest rate rise has occurred because the Reserve Bank wants to cause a slump in prices. It’s an effective move to make that happen but it won’t happen suddenly, making it a great time to think about buying.”

Similarly, falling interest rates can be a great time to sell because many new buyers come to the market. Often those buyers have been waiting for rates to fall so they’re keen to get into a property right away and can offer you a quick sale at a good price.

Despite the hype that often comes with an interest rate change, there’s no need to panic. It’s highly unlikely anything drastic will suddenly happen. It takes time for the market to react. Smart investors can take advantage of this.

“There’s a key strategy in timing the sale of a property when interest rates change,” says Ash. “The run-on affect on the market isn’t immediate. If you’re looking to sell, understand that all the talk about the market slowing down isn’t going to happen in a week or even a month. It takes time for the market to shift and for us to see how large that shift will be, if at all.

“A seller can still do well after an interest rate increase and a buyer can still do well after a drop. There are other complex forces at play too such as inflation and household debt levels. Interest rates are one of those factors but it’s not everything. Times like these make it even more important to talk to an expert who is genuinely interested in helping you prosper in the market.”

Smart strategies

History shows that there’s no set formula for how the market will react when interest rates change. While they are a major factor in real estate prices, they’re only one of several factors so be careful who you’re listening to and where you get your information. There are a lot of armchair experts willing to give an opinion!

“Predictions are always what’s likely to happen,” Ash says. “The more you know, the more accurate your predictions can be, but we’re not talking about an exact science here. There are always other variables, especially the location of the property.”

Regardless of whether you’re looking to sell, buy or invest now or in the future, staying up to date with economic news and trends are all vital information to keep in mind. The smartest strategies include many factors and an understanding of real estate trends. Nothing, however, tops knowing the specific location you already have property in or are looking to buy into. Not all national trends are also happening in every suburb or town. 

You don’t need to spend a lot of energy learning about all this or monitoring changes when you have a real estate expert like One Agency Orange who are happy to share their years of experience with you. Give us a call or come and meet the team in person at our office in Summer Street. We’re Orange’s friendliest and most helpful agency. Our service is all about making your real estate experience as stress-free as possible.

02 6362 9560 | Suite 7/230 Summer Street Orange NSW 2800