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. 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.

No doubt we will see a few bumps in the road ahead, but the fundamentals forNew Zealandproperty remain strong.

*Statistics New Zealand, September 2010 report.

Sean Thomson is the Senior Adviserat WBP Residential Advice.