Will Higher Interest Rates Topple the Property Market?

It's the most frequent topic of conversation floating around the property industry these days - what effect will further interest rates rises have on the market?

Many are predicting that rising rates will automatically lead to falling house prices as sure as night follows day. Yet recent history indicates that the property market is more aligned with the broader economy than mortgage rates.

The theory behind the rates make property prices notion is that a strong economy inevitably leads to higher interest rates and this proves to be a significant disincentive to buyers. If rates push up the cost of borrowing, demand is driven down and property prices fall.

Things are rarely this simple. It's certainly true that in the weeks following a rise, sales results do often dip. But this effect is usually temporary and mostly confined to the very top and bottom parts of the market.

In the broad middle of the market, births, death and marriages continue to create buyer demand, even if budgets need to be reined in a little. We can see this underlying reality in the last Australian Bureau of Statistics figures from 2010. Despite the three consecutive months where interest rates rose, the following three months saw home loans rise*.

Yes, higher rates and gloomy newspaper headlines will scare some people, but for every buyer deterred another sees an opportunity to buy without having to outbid the competition.

The truth of the matter is that Australia's accelerating economy is pushing up interest rates, but it's also delivering a significant increase to national income - much of which will find its way into the property market. But, supply of new property across Australia remains constrained by restrictive planning laws and slow land releases.

No doubt we will see a few bumps in the road ahead, but the fundamentals for Australian property remain strong.

*Australian Bureau of Statistics, September 2010 report.

Sean Thomson is the Senior Adviser at WBP Residential Advice, a Melbourne based service which buys capital growth oriented property for investors.

[1] ABS September 2010