During the past two years, the Australian property market has steamed ahead with 35 per cent growth in Australian house prices—but now rising interest rates and a ‘correction phase’ are seeing Australian house prices start to fall.

Interest rate rises on home loans and mortgages are also putting pressure on first home buyer, borrowing capacity and real estate investing in general.

Rising interest rates and ‘correcting’ house prices could provide an opportunity for real estate investing in the Australian housing market for the longer term.

During the ‘correction phase’, the big banks expect to see the Australian house prices in the Australian housing market rise or fall by about 3 per cent in 2022 and drop by between 8 and 10 per cent in 2023.

But this will not be of too much concern to longer-term property investors as national home prices rose by 35 per cent since the start of the COVID pandemic.

In fact, it is predicted that if Australian house prices fall by 10 per cent, it will only take property prices back to 2021.

So why is the Australian property market in a ‘correction phase’?

Basically, the 35 per cent increase in Australian house prices since the beginning of the COVID pandemic could not continue.

Lower interest rates, providing affordable access to more money for first home buyers, and property investment is being tempered with the Reserve Bank of Australia increasing interest rates.

Added to this is a general slowing of Australian house prices across the Australian property market.

There are, of course, other factors at play in addition to interest rates and borrowing capacity in relation to Australian house prices and property investment, including inflation, growing wages and government initiatives.

Inflation and interest rates

The Reserve Bank of Australia’s decision to increase the cash rate by 50 basis points to 1.35 per cent on 5 July 2022 was based on concerns that inflation was too high at 5.1 per cent for the March quarter of 2022.

This was the highest quarterly inflation reading since the introduction of the GST in the early 2000s.

In a speech on 21 June, RBA Governor Philip Young said:

‘ … we are now expecting inflation to peak at around 7 per cent in the December quarter. Following this, by early next year, we expect that inflation will begin to decline.’

And then, in a media release announcing the increase in the cash rate on 5 July, Mr Young said: 

‘Inflation is forecast to peak later this year and then decline back towards the 2–3 per cent range next year.’

The RBA Governor also said in that release that the increase in interest rates was: 

‘ … a further step in the withdrawal of the extraordinary monetary support that was put in place to help insure the Australian economy against the worst possible effects of the pandemic.’

Government decisions

The Federal Government has recently made several positive decisions for property investment and investing in the Australian property market.

These include reopening Australia’s borders, resuming Australia’s migration program and introducing a shared equity scheme to help make buying easier.

Opening Australia’s borders

From 6 July, people entering Australia no longer need to provide evidence of vaccination status or need a travel exemption if they are unvaccinated.

Likewise, people leaving Australia will not be asked about their vaccination status, which suggests a lead to more business and tourism travel and more opportunities in the Australian housing market for real estate investing.

Resumption of Australia’s migration program

The Federal Government’s 2022-23 Migration Program, according to the Department of Home Affairs, is:

‘ … designed to boost Australia’s economic recovery’.

The planning level for 2022-23 is 160,000:

• Skill 109,000 places, and 
• Family 50,000

This is good news for property investment and the Australian property market as these new Australians will need somewhere to live.

Shared equity scheme

The new Federal Government went into the recent election with a policy called Help to Buy that would be open to 10,000 Australians each year and cut the cost of buying a new home by 40 per cent. It would do this by the Federal Government contributing up to 40 per cent equity of the purchase price of a new home.

The ACT Government has a similar scheme for eligible tenants to purchase their public housing where ACT Housing retains 30 per cent equity.

The NSW Government recently announced nearly $800 million for a shared equity scheme, eligible for 3000 purchases per year, for a two-year trial, where the NSW Government would contribute up to 40 per cent equity for a new home or 30 per cent for an established home.

Conclusion

From a real estate perspective, the combination of the RBA interest rate increases to manage a potential increase in inflation, the recent minimum wage increase of 5.2 per cent, and the Australian house prices ‘correction phase’ suggests that property will be cheaper in the coming 18 months.

The current economic climate could provide the right opportunity for property investment with an eye for longer term goals.