Why rising interest rates are hurting houses more than apartments

The latest research from Australia’s central bank shows that houses are the hardest hit by the latest market slump, particularly luxury homes. This sensitivity may be related to rising interest rates.

The Reserve Bank of Australia’s (RBA) head of domestic markets, Jonathan Kearns, said that more expensive areas in Australia’s property market were especially vulnerable to rate changes – more so than apartments.

When you consider that rising interest rates cap the borrowing power of everyday Australians, it’s not entirely surprising that our ability to afford greater-valued homes is decreasing in tandem.

Luxury values are falling: why interest rate hikes could play a role

For Australia’s capital cities, the RBA found that the price of the most expensive quarter of dwellings is over 10% lower, on a six-month ended annualised basis. Meanwhile, the value of the least expensive dwellings is almost 10% higher.

Earlier in July, CoreLogic research found that higher-priced properties were more likely to fall in value before low-middle income areas, as interest rates rise. In the three months to May 2022 (featuring one cash rate hike in May), prices had fallen by almost $200,000 in some suburbs. However, the greatest quarterly changes were recorded in areas with median values of $1.8 million - $2 million plus.

Following the very first RBA-led cash rate hike in May, RateCity data found that this single 25-basis point increase meant a person earning $100,000 (before tax, with no dependents or debts) would see the maximum amount they could borrow from a bank fall by $20,000. The initial RateCity research also showed that by the time the cash rate hit 2.25%, this person’s borrowing capacity would drop by a total of $123,400.

After five hikes to the cash rate in a row, the cash rate now sits at 2.35%. The maximum amount this hypothetical Australian could be approved to borrow may have fallen even more significantly. So, it’s not unsurprising that our capacity to afford higher-valued homes is shifting downward and decreasing property values with it.

At the Australian Financial Review Property Summit, Jonathan Kearns advised that properties in places with:

• Inflexible housing supply
• High levels of mortgage debt
• More investors, and
• Higher incomes

Were more likely to face exposure to a “rate-driven property price downturn”

However, Mr Kearns isn’t totally convinced it can all be blamed on interest rate rises, stating that, “These estimates do not indicate that these factors cause housing prices to be more responsive to changes in interest rates, but they do highlight that the sensitivity of housing prices to interest rates is not going to be uniform across the country.”

“It appears that the limited supply of available zoned land partly explains this result,” he said.

That being said, falling interest rates, as well as government support schemes for first home buyers, have been a driving force behind soaring property prices, prior to the 2022 cash rate hikes.

RateCity.com.au research director, Sally Tindall, warned: “The RBA rate hikes have the capacity to apply a significant handbrake to Australia’s property market”.

“If the rate hikes keep coming, as they’re forecast to do, people could find their home buying budgets shrink further and further. Anyone planning to take out a new home loan in the coming months needs to carefully consider how much debt they take on,” Ms Tindall said

If you’re considering purchasing property, it may be worth checking how much you could be approved to borrow before you apply for your first or next home loan. RateCity’s Borrowing Power Calculator could help you by showing you an estimate of what you may be approved to borrow, based on your financial situation and the current market.

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