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How interest rates impact Australian Property Investment


The intricacies of the Australian property market have always needed a sharp mind and a strategic approach to navigate. Whether you’re keen to kickstart your investment journey or expand your portfolio, the synergy between interest rates and property investment highlights both opportunities and challenges. Understanding the current economic climate and the Reserve Bank of Australia's (RBA) cash rate decisions is important to stay well-informed in this ever-evolving market.


The current Cash Rate and its impact


Following a series of interest rate hikes intended to curb inflation, the RBA’s cash rate stands at 4.4% as of June 2024. According to Adam Duffy, Partner at Meridian Property, there’s no doubt the last thirteen rate rises have significantly impacted Australia’s property market, testing its resilience and reshaping buyer behaviour.


“One of the most immediate effects of rising interest rates has been the increased cost of borrowing. For many young professionals, higher mortgage rates mean reassessing their purchasing power. The dream of property investment and home ownership has become more elusive as monthly repayments swell. Potential buyers have had to lower their expectations or delay their entry into the market altogether.”


However, the resilience of the Australian property market has been nothing short of remarkable. When it comes to the performances of each city, the differences are stark. Some markets have cooled, others have surged ahead. Despite these rate increases, the market has continued to rise for 18 consecutive months, proving the strength of demand and the underlying confidence in property as a long-term investment. 



“Cities like Perth and Adelaide are experiencing significant demand due to their relative affordability compared to the eastern seaboard,” Adam explains. “It’s clear that a one-size-fits-all approach is no longer viable for property investors, and market selection is essential for investors.”


Instead, he suggests a carefully considered, data-driven strategy is essential for identifying opportunities and mitigating risks.


Interest Rates are slowing new entrants to the market


Without a doubt, higher interest rates have undeniably slowed the influx of new entrants into the market. An increased cost of borrowing, paired with stricter lending criteria, has left many would-be buyers on the sidelines. But, according to Adam, this doesn't mean that the property market is stagnating. “It’s just the opposite. We’re seeing an interesting shift in buyer behaviour, particularly among those priced out of the traditionally dominant markets of Sydney and Melbourne,” he says. “Many investors are now looking beyond these cities and have their eyes on more affordable markets like Perth and Adelaide.”


This shift has not only revived these local economies but has also added fuel to their already thriving property markets. Perth and Adelaide offer affordability, robust local economies, and rental markets that have reached critical levels.


With rental prices soaring, the gap between renting and home ownership has narrowed considerably. Adam provides insights as to why this is the case. “For many, the decision has become one of practicality; why continue renting when mortgage payments are nearly on par? This has led to a notable trend where frustrated renters are leaping home ownership, which further drives the demand in these markets,” he explains.


The resilient Australian property market


One of the most intriguing aspects of the current property market is its resilience in the face of rising interest rates. The team at Meridian Property have traditionally seen higher interest rates calm property prices as borrowing costs rise and buyer demand weakens. However, the Australian property market has defied these expectations.


“Even as interest rates have climbed, property values across the country have continued to rise. The market's underlying strength is proving to be so robust,” Adam ascertains. “We’ve seen this supported by limited housing supply, strong demand, and the ongoing appeal of property as a safe and stable investment.”


What happens when rates fall?


Economists are forecasting a series of rate reductions, sparking curiosity about how a sturdy property market will respond when borrowing costs decrease. If the market has managed to grow during rising interest rates, the potential for growth during a period of falling rates is significant. 


“This potential shift highlights the importance of staying receptive to market dynamics and economic trends,” Adam advises. “It presents both opportunities and challenges. On the one hand, lower interest rates could make borrowing more affordable, bringing home ownership within reach for a larger cohort of buyers. But, on the other hand, a surge in demand could drive property prices even higher, particularly in markets that have already seen significant growth.”


We’ll have to wait and see. The impact of interest rates on Australian property investment is multidimensional and complex. The resilience of the property market, even in the face of rising rates, offers both reassurance and a reminder of the importance of staying well-informed and adaptable with a strategic approach in such a fast-moving environment.


Contact the experienced team at Meridian Property for an obligation-free chat about how interest rates could impact your property portfolio or investment strategy.




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