Will Australia Raise Interest Rates in 2022? Will Rate Hikes Cause a Property Crash?

As is well known, central banks formulate macroeconomic policy by forecasting a nation's future economic outlook, and adjusting the benchmark interest rate is one of their most important tools. Key considerations include future economic trends, the pace of income growth, and the inflation rate.

In November 2021, the Governor of the Reserve Bank stated that there was no intention to raise interest rates in order to curb rising house prices. In deciding whether to raise rates, the central bank must consider whether the pace of economic recovery is effectively lifting national incomes. If it is not, the central bank will not lightly raise rates, because doing so would affect repayment capacity. Moreover, once the benchmark rate rises, it would affect the repayment amounts on all variable-rate loans, including commercial loans, reducing businesses' profitability and further constraining wage growth for employees.

But if rates really do rise, how would that affect the housing market? Would it truly cause a housing crash, as some predict?

In fact, Australia's banking system is very conservative. When assessing loans, banks typically calculate the borrowable amount based on 70% or 80% of the applicant's income, and loans include a 2% buffer rate — that is, the borrower's repayment capacity is assessed at the current loan rate plus 2%. As a result, Australia is very unlikely to experience the kind of situation seen in the 2008 US subprime crisis, where borrowers could no longer meet repayments and rushed to sell off their properties.

In addition, the continued growth in Australian house prices over recent years has been driven mainly by supply and demand: 1. Demand keeps rising. In terms of population growth across the states over the past 12 months, Queensland has stood out the most.

Aside from natural birth rates, the main driver of Queensland's population growth is interstate migration, with large numbers of New South Wales and Victoria residents choosing to relocate to Queensland. This has fuelled rapid growth in demand for Queensland property. The table also shows that, due to the pandemic, overseas migration fell sharply over the past year. It is not hard to imagine that, once the pandemic eases, overseas migration figures will also turn positive, further intensifying Queensland's population growth.

2. There is a shortage of land supply in the new-home market: land supply and approval speeds cannot keep up with demand. Meanwhile, the stock in the established-home market keeps shrinking. One important indicator is the ratio between the number of new properties listed in a given period and the number of properties sold over the same period. Over the past decade, this ratio has been around 0.9 — meaning that for every ten new listings in a given period, there were nine sales. According to recent CoreLogic data, this ratio in Australia's state capitals is at least 1.2 at the lowest and as high as 2.

3. Australia's property market is dominated primarily by owner-occupiers, and investors find it hard to sway house prices. In other words, property development and demand come mainly from genuine, essential demand within Australia. Australia conducts a national census of population and housing every five years; the most recent was in 2016, as the 2021 census was not carried out due to COVID-19. According to the 2016 data, owner-occupiers accounted for nearly 70% of that year's property transactions.

4. With borders closed due to the pandemic, overseas investment has continued to decline. Even so, over the past two years overseas investors still invested as much as A$6 billion in residential property in Australia. Of this, 92% went into three states: New South Wales, Victoria and Queensland. Overseas investment makes up a relatively small share of Australia's overall property sales — according to National Australia Bank's 2021 data, it accounted for about 2.2% of established homes and around 3.7% of new homes. Once the pandemic situation improves, overseas demand will also surge.

5. Investment returns: Take Brisbane as an example — the vacancy rate is very low, at around 2%, and rental returns are high, with a gross yield of at least 4% or more. A property can essentially pay for itself. Across Australia as a whole, compared with Sydney and Melbourne, Brisbane and the Gold Coast in Queensland — along with some surrounding regional areas — have substantial room to grow.