Interest Rates and the Housing Market

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Real research does take time, not just hot air.  The speculation about interest rate increases driving the market up is again more simplification of what is an inherently greater problem surrounding our industry.  Too many people are too prepared to make broad sweeping statements that in fact have little bearing on reality or truth.

The team at National Property Research enjoy busting some of the myths that are constantly bandied about.  In fact we were asked to do this exact thing at the UDIA’s State conference just last month.  So here is the latest one.  The thought that interest rates impact house sales volumes is quite simply wrong.

For those that are mathematically minded, the r squared correlation is 0.08, so far from compelling to actually be irrelevant. (…and for those who are not mathematically minded, a weak correlation starts around 0.8)  To suggest that when interest rates increase that buyers will come out of the woodwork to buy, fails to take into consideration so many of the other factors that are causing household stress outside of individual’s mortgages.

As an example, insurance rates have continued to escalate on average by 7.2% per annum over the past two decades.  By contrast, the long term average increase to wages has been 4.6%.  The rate of escalation in house prices over the same period of time for the median house in Brisbane has increased at 7.8% per annum.  It doesn’t take long to work out that with wages growing at 4.6% and most other household expenses exceeding that, the household budget continues to be stretched and eroded by higher costs.  

The old chestnut about interest rates impacting prices is also another one of those comments that continually pops up.  Again the reality is a lot different than the generally pursued oversimplification of interest rate increases being designed to slow property growth.  There is no doubt that interest rates if applied badly in the economy will slow housing, but the reality is that it will slow everything else with it.  Again for those who like their evidence in mathematical terms, the r squared  for this is a miserly 0.13.

So what is the message about interest rates?  For Brisbane at least it is that interest rates simply do not correlate with the volume of house sales nor the increases in house prices.  There is no doubt they are contributing factor in the movement of both, but the oversimplification of determining that interest rates going up will stimulate buyers or pull buyers out of the market is about as theoretically based as the world being flat.  There is considerably more at work here than the RBA’s decision every month and until everyone get’s their head around this, interest rate movements will continue to be treated as a national spectacle.