Will house prices drop as interest rates rise?

“Will the house prices drop now that the interest rates are rising?”


This is the inevitable question I’ve been asked a lot recently. While I don’t have a crystal ball, and I can’t see into the future, as a real estate agent and property manager on the Gold Coast, I would say they answer to this is no. I’d go the step further to say I definitely don’t see this happening for the Gold Coast or regional Gold Coast/Brisbane/Sunshine Coast areas while there is still such a desire to move here from insterstate or overseas. 50% of the enquiry I had for my last two Gold Coast property sales were from interstate buyers.


What I know to be true from historical data, is that a rise in interest rates has never correlated to a drop in house prices. In Australia, the last property boom was between 2002-2004 and at this time the interest rates were increased again and again, to just under 6%.  Interestingly, during that same time, and in the years to come (when interest rates hit 6.5%) the property prices in Australia wide, actually rose by 50%. 


So why won’t interest rates cause house prices to drop? Surely households will no longer be able to afford repayments and will have to sell their property at a loss just to survive? Well for a few people that could be the case. They may have overextended to begin with, or their circumstances may have changed since taking out their mortgage, however for most this isn’t the case for a couple of reasons.

When a bank asses your financial situation at the time of giving you a home-loan, they don’t use the current low interest rates, they will asses your ability to pay the mortgage back at a much higher rate. Some of the big banks for example have been using a 5.5% interest rate to work on while interest rates were at 2.5%. 

Research data from Core-logic shows that most households are ahead with mortgage repayments, Many homeowners are 2 years or more ahead with mortgage repayments. This means that the 0.25% and 0.5%, even 2% interest rate rises, will not have much affect on these families. 


What I believe we will continue to see however, is the increase in rents due to the low vacancy rates. It’s below 1% in a lot of the major cities. This definitely won’t change with interest rates rising, as the majority or homeowners will pass on the increased costs related to owning that investment property. This will increase the “going market rent” which will encourage the landlords to seek the higher rent, and enforce the property managers to do the best for the owners.

(If you are struggling with your rental situation, check out my Top 10 Tips for surviving the rental crisis)


Only time will tell if I’m right, however my advice, is that if you’re holding out for house prices to plummet before you buy you first or next home, I think you’ll be waiting a long time!

Post by Deb Farquhar

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