It’s almost impossible to open a newspaper or get through a TV news bulletin, without hearing about interest rates.
In fairness, with interest rates increasing 12 times in the past 13 months, it has constituted news more often than not.
It’s a reason I see many put their plans on hold, whether it’s plans to buy their own home or an investment property.
But is there actually a relationship between house prices and interest rates?
Do high interest rates mean property prices will go down?
Do low interest rates mean property prices will increase?
To answer this question, I broke down the Reserve Bank of Australia cash rate over the past 25 years and the increases or decreases to property prices in the same period. A warning, I have included a lot of statistics for you in this piece, but it’s worth taking your time to read through and absorb the details of what I uncovered.
So, to the results:
In the past 25 years, the median house price in Australia has:
- fallen in value on four occasions;
- increased by less than 5 per cent on seven occasions;
- increased by between 5 per cent and 10 per cent on six occasions; and
- increased by more than 10 per cent on eight occasions.
That is an increase 21 times versus a fall on only four occasions.
The Reserve Bank of Australia targets a cash rate of between 2 per cent and 3 per cent.
In the past 25 years, the cash rate was higher than 3 per cent on 15 occasions. Property prices in those 15 years have:
- fallen in value on two occasions (by 1 per cent and 3 per cent respectively);
- increased by less than 5 per cent on two occasions;
- increased by between 5 per cent and 10 per cent on four occasions; and
- increased by more than 10 per cent on seven occasions.
Again, 13 property price increases versus two falls.
In the past 25 years, the cash rate was less than 3 per cent on 10 occasions. Property prices in those 10 years have:
- fallen in value on two occasions (by 6 per cent and 7 per cent respectively);
- increased by less than 5 per cent on four occasions;
- increased by between 5 per cent and 10 per cent on two occasions; and
- increased by more than 10 per cent on two occasions.
So even when the cash rate is low, property prices increased eight times versus a fall on two occasions.
While interest rates certainly have an impact on property prices, such as buyer and seller confidence and ability to borrow, there is no clear relationship between interest rates and property values.
High interest rates do not cause property prices to decrease and low interest rates do not cause property prices to increase.
If anything, the above numbers demonstrate the likelihood of prices increasing when interest rates are high rather than when interest rates are low. After all, property prices increased 13 out of the 15 years when interest rates were high, compared with eight out of 10 years when interest rates were low.
The value of property comes down to supply and demand.
Interest rates are only one of many factors influencing the supply and demand of housing.
Finally, it’s worth noting that the Australian median house price has fallen in value just four times in the past 25 years (by 1 per cent, 3 per cent, 6 per cent and 7 per cent respectively).
Prices have increased by somewhere between 1 and 10 per cent 12 times in that period.
Prices have increased by more than 10 per cent a whopping nine out of 25 years.
I admit I had an emotional bias before doing this exercise, but I was surprised by these numbers. I wrongly assumed prices were more likely to decrease in a high interest rate environment and increase in a low interest rate environment.
But as the saying goes, there’s only truth in numbers.
The takeaway?
If you can afford to do something today, do it. If you can’t afford it, don’t do it. But make the decision based on the answer to those questions, not because of external noise with no relevance.
