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Why House Prices Are Not Going Down Even Though Rates Are High?

Homeowners may have experienced a brief moment of relief, with the Reserve Bank of Australia’s decision to hold interest rates at 4.1 per cent in July. This month-on-month hike of interest rates was implemented in order to reduce inflation, yet another crucial element of the economy remains on the rise without any indication of slowing.

So why do house and unit prices in Australia remain unaffected? A variety of conditions have created a buffer protecting house prices in Australia, even as mortgage payments become increasingly more difficult to make.

The Domain Forecast Report for the 2022/23 financial year identified four causes for the elevation of real estate prices. In five capital cities, Domain’s report predicts that the market will soon find record-level high prices. This includes houses in Sydney, Adelaide and Perth, as well as units in Brisbane, Adelaide, and Hobart.

The first explanation for increasing house prices is the current volume of listings, which is 11 per cent lower than the five-year average for all capital cities. This denotes increasing competition among buyers, thus stabilising or increasing prices in certain markets. This is likely a result of decreased economic confidence, leading vendors to choose to not list their properties.

The second factor is the large influx of international students, skilled temporary visa holders, and working holidaymakers that have arrived since the cessation of border closures induced by the coronavirus. As the tight rental market has caused difficulties finding available homes, some of these arrivals have instead chosen to enter the market for buying a property.

Domain’s analysis predicts that 300,000 houses are needed in the next two financial years to accommodate this population surge, with the states of New South Wales, Victoria, and Queensland requiring the most housing. Increased costs for the construction of houses, resulting from the pandemic-induced recession, have also been cited as a cause of rising prices.

Both the cost of inputs and the cost of outputs have experienced large increases, leading to issues within the construction sector. With builders struggling to keep up with demand, the cost of constructing a house has risen by 32 per cent since the start of the pandemic.

The final reason for the current upward trend in prices is the restrictions that banks have placed on borrowers. In an effort to reduce the chances of high-risk lending, banks have demanded higher incomes and greater assets from potential buyers in order to be approved for a loan. For this reason, would-be buyers may have to forgo some of their desired properties and make a purchase with what finances they have. This creates more competition at the lower end of the market and pushes prices higher.

It is important to bear in mind that the direction the housing markets take in the upcoming months could still be in flux as the coronavirus continues to cause economic disruption. However, based on what is known currently, Domain’s report states that house prices in Sydney and Perth, as well as unit prices in Melbourne, Brisbane, Adelaide, and Hobart, will likely continue to move in an upward direction.

The factors of fewer listings, an influx of international citizens, high construction costs, and stricter loan criteria all contribute to this market trend. Despite increases in interest rates, house prices are yet to show any sign of slowing.


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