Tony Alexander: Higher interest rates are unlikely to kill off the house price surge

Credit: OneRoof

ANALYSIS: As had been universally expected, the official cash rate set by the Reserve Bank was left unchanged at 5.5%. It was taken to this level on May 24 and since then the Reserve Bank has repeatedly said that the rate will need to remain at this elevated level for an extended period before it can feel truly confident that inflation is safely under control and set to get bedded back near 2%. It is currently 6%.

Since the end of May the cost to banks of borrowing money at a fixed rate for one year to lend for mortgages at a fixed rate for one year has increased 0.25%. The cost to them to borrow fixed two years has risen 0.6%, three years 0.8%, and five years 0.9%. As a result, banks have lifted their fixed lending rates even though official monetary policy has not changed.

These borrowing costs have gone up because of higher interest rates in the United States, which is now experiencing faster-than-expected growth and stronger-than-expected labour markets. That has led to extra worries about inflation and more tightening of US monetary policy.

Borrowers are obviously not happy about this situation, although the Reserve Bank clearly feels extra restraint via higher mortgage rates is a useful thing – if it didn’t, it would have cut the cash rate 0.25%-0.75%.

So, with mortgage rates having newly climbed by between 0.25% and 0.75% over the past four months, is the housing market about set to weaken? No, and it is clearly becoming stronger. Interest rates have a big impact on the housing market, but they are not the be all and end all and many other factors are relevant to whether people are thinking about buying or selling a property, the price they will accept, and the timing for their transaction.

A big one is the boom in net immigration, which now stands at a record 96,000. Eventually this boom will restrain wages growth and help contain inflation. But for now the main effects coming through are increasing easiness for businesses of finding staff, and extra pressure on rents and housing availability. Both first home buyers and investors are responding to the unfettered population surge by accelerating their property purchases.

Or, perhaps it is more accurate to say they have decided to delay their desired purchases no longer despite rising financing costs.

Assisting their purchasing decision is the growing discussion of property developments failing, people losing their deposits, and businesses going into liquidation. Growth in new house supply is falling and potential buyers are for now looking at purchasing a property already built rather than buying off the plan in a multi-unit complex in particular (although this will change come 2025).

Pic tony Alexander 2


Independent economist Tony Alexander: “A potential change in government will bring investors back into the market.” Photo / Fiona Goodall

Then there is the general election in play. A potential change in government will bring investors back into the market over time while discouraging many from selling, and foreign buyers may become a presence at the upper end of the market with a trickle down effect to perhaps the $1.7mn priced properties.

There are other things having an impact such as banks slightly easing lending criteria, special purchase assistance programmes, and prices having pulled back a lot from their late-2021 peaks. But the upshot is this. With average house prices having risen 2% nationwide in the three months since the end of May, including 3%-plus in the three main cities, any negative impact from newly rising mortgage interest rates is being swamped by other factors highlighted here for a long time now.

Interest rates don’t look like falling for a while and the impact of high job security will wane through 2024 as the unemployment rate rises. But the upward leg of the house price cycle which started in June will roll on with slowly gathering – but not rapidly escalating – strength through 2024 to 2026.

– Tony Alexander is an independent economics commentator. Additional commentary from him can be found at

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