Few people were surprised when interest rates began to rise again in May, after stalling at 0.1% for 18 months during the worst of COVID.

In saying that, many industry experts - both financial and property - have been alarmed if not shocked by the Reserve Bank of Australia (RBA)'s tough stance on the cash rate, with high monthly rate rises now becoming the norm.

As we mentioned after the September 7 cash rate rise to 2.35%, since May’s 0.35% change, the cash rate has gone from 0.85% in June and 1.35% in July to 1.85% in August.

But apart from (hopefully) helping inflation fall back to the RBA's gold star ideal of 2%–3%, how will these interest rate changes affect the property market?

How will rising interest rates affect the property market?

In the most general terms - and we can't emphasise this enough! - rising interest rates result in:

• Reduced borrowing capacity and power
• Property value declines 
• Larger mortgage repayments 

"Proverbial barbecue conversations"

RBA's Head of Domestic Markets, Jonathan Kearns, spoke about this issue - one he described as very topical in news coverage and "proverbial barbecue conversations"- at The Australian Financial Review Property Summit on Monday, September 19.

Mr Kearns said the impact of rising interest rates on housing prices depended not only on how much they change but for how long. 

As RBA governor Dr Phillip Lowe said a week earlier, Mr Kearns admitted that while higher interest rates generally depressed both residential and commercial property prices, there was still "considerable uncertainty" as to the magnitude and the timing of this depression.

But let's get more into the nitty-gritty of the current property market, coming as it does amidst high inflation, the dregs of a global pandemic and a Ukrainian-Russian war.

How will rising interest rates affect property buyers?

The Downside

Mr Kearns explained that if and when the RBA's full 225 basis point increase was passed through to mortgages, borrowers' maximum loan size will be reduced by around 20%.

Repayments on a new (principal and interest 25-year) loan will also be around 25% larger than those prior to the rate hikes, Mr Kearns said.

The rate of property price growth will also slow down amidst the general belief that interest rates would continue to increase, according to finance professor Shaun Bond, from The University of Queensland Business School - and this trend may well continue into 2023.

Prof Bond recently explained that the combination of multiple mortgage rate increases over the next two years and increased living costs would be a challenge for some households, with new borrowers, in particular, finding this period a struggle.

"My biggest concern will be the areas with a high concentration of borrowers who have taken on relatively large loans recently and who are already starting to feel the financial pressures of the overall cost of living increases," he said.

"This (situation) is likely to particularly impact those suburban and regional areas that have seen some of the highest jumps in prices over the last two years, particularly if wage growth does not keep pace with the cost of living increases."

The Upside

On the other side of the coin, the pain of higher interest rates could be a short-term one and be a bonus for buyers in the long term.

Mr Kearns explained that new buyers' higher mortgage repayments would only be required for around two years - at least if the reason for this increase was solely based on higher interest rates, and not other factors.

"This suggests that because higher interest rates reduce housing prices and so, mortgage sizes, mortgage payments for new borrowers could ultimately be lower than if interest rates had not increased," Mr Kearns said.

Mr Kearns added that most buyers didn't take out a maximum-sized loan either.

"In fact, in recent times, banks have reported that only around 10% of borrowers take out a loan close to their maximum possible size," he said.

Ryder Research's Terry Ryder also believes there's far more to interest rate spikes than meets the initial eye, with major banks actually cutting interest rates for new customers in the second half of May - weeks after the first cash rate increase since November 2010.

Mr Ryder said competition remains very strong among major mortgage lenders.

"So if you approach one of the major banks for a new loan, you will be paying an interest rate lower than the prevailing level before the first Reserve Bank decision," he said.

Prof Bond also emphasised that Australia enjoyed a "robust" economy.

"The fundamentals are still in place to provide support for the housing market to continue growing," he said.

"This is particularly noticeable in an area like South East Queensland, which is experiencing strong interstate migration and limited housing supply."

How will rising interest rates affect property sellers?

The Downside

Prof Bond believes there will be some softening in house price growth as interest rates rise.

Certainly, reduced borrowing capacity and consumer confidence may see fewer buyers at open house inspections and vendors may have to accept lower sales offers for their property.

Property values across the country have been heading downhill for some time already, with CoreLogic’s national Home Value Index (HVI) recording a fourth consecutive month of decline in August.

The Upside

However, the country as a whole is still struggling with a continuing low volume of stock along with high buyer demand - and neither of these trends are going away any time soon, if at all.

As well, as our sister company Lending Loop recently discussed, spring is traditionally the busiest and best time of year to sell and this year, the sunnier seasons are already shaping up to be excellent periods for vendors, despite the doom and gloom of rising interest rates.

According to CoreLogic, the week commencing September has in fact been the busiest auction period since late June, with 2,190 auctions held across the combined capital cities, up from 1,918 events over the previous week and 1,672 this time last year.

Preliminary clearance rates were also on the up, standing at 62.5% which compares well to the previous week's figure of 61.7%.

Not bad for a country supposedly in a terrible melodrama of perfect property storms!

In further encouraging news for property buyers, Mr Ryder said it was crucial to learn a lesson from Australia's property history when considering the current period of rising interest rates.

"The lesson from history is that periods of high and rising interest rates tend to deliver property booms with rapidly rising prices," he said.

"Previous nationwide property booms in Australia have happened during times of very high and rising interest rates.

"The proposition put forward .... is that rising rates mean falling prices (but) if that were to happen, it would be unprecedented in Australia."

How will rising interest rates affect homeowners?

The Downside

Larger mortgage repayments amidst already high cost of living struggles are the key downside to rising interest rates for homeowners.

Inflation is still too high for the RBA's liking and an energy crisis isn't helping either.

The Upside

While there's little to be done about such issues in the short term, Australia's property history again comes into play when predicting its future.

Mr Ryder believes rising interest rates will definitely not cause massive increases in mortgage stress.

This is in large part because of the silver lining of COVID: large savings buffers.

"Most major lenders have issued statements confirming that the vast majority of their customers will be comfortable with higher rates, because they are well ahead on their repayments, and they have built up savings during the period of COVID restrictions," Mr Ryder said.

"ANZ and Westpac both say three-quarters of their customers are well ahead on their repayments and BankWest says 90% of their customers are ahead.

"The other big buffer in the system is the requirement by APRA that lenders assess their borrowers on their ability to repay loans at much higher interest rates."

We're here to help

In more good news for buyers and sellers - including first-home buyers, investors and refinancers - buying or selling off-market with Listing Loop reduces the risk of missing out on a great home for a great price or a great sale.

We can also help you navigate this choppy market we're currently experiencing.

If you're not a member, sign up for free at Listing Loop or download our app.

Our off-market and pre-market marketplace gives you VIP access to properties so you can get in first.