Interest Rates and Rents: What’s Really Driving Australian Property Prices

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What’s Really Fueling the Australian Property Market: Beyond Interest Rates

In an ever-changing property market, understanding what truly drives prices and rents is essential for any savvy investor or first-home buyer.

With rising interest rates and booming auctions, it’s easy to assume rates are the biggest factor – but the data tells a different story. In this latest analysis, we break down the key forces shaping the Australian property market for the week ending October 25, 2024.

Read on to find out how demand, affordability, and rising building costs are impacting your next property move.

The property market is always evolving, and it’s important to stay ahead of the game. In this week's insights, we take a closer look at what's really driving the Australian property market.

While interest rates are often blamed for rent and price hikes, the reality is far more complex. Let's dive into the latest data and trends

Interest Rates and Rents: What’s Really Driving Australian Property Prices

Rates Don’t Drive Up Rents – The Real Story Behind Rental Increases

You might assume that rising interest rates directly lead to increased rents, but new research from the Reserve Bank of Australia (RBA) shows that interest rates have a minimal impact on rent hikes. In fact, the data suggests that for every $1 increase in loan repayments, rents only increase by 1 cent.

Between April 2022 and January 2024, loan interest payments for investors rose by around $850.
Despite this, rents only increased by less than $10 per month, or just over $2 per week.

So, what’s driving rental increases? According to the RBA, it's demand that's outpacing supply, not interest rates.

More people are looking for properties, and there simply aren’t enough homes available.

Key takeaway: It’s a case of correlation, not causation. While interest rates and rents rise at the same time in the economic cycle, the link between the two is smaller than expected.
What this means for you: If you're a property investor, the rising costs aren't necessarily being passed on to tenants. Instead, you may be absorbing these increases.

Correlation between rising interest rates and rent increases in Australia.

Property Values Keep Rising – Affordable Suburbs Lead the Way

Despite the ongoing rise in interest rates, 77% of Australian suburbs still have median house prices higher than two years ago. The same applies to 71% of suburbs for units. So, what's behind this sustained growth?

The data shows that affordable suburbs are driving price growth, particularly in South Australia, Western Australia, and Queensland.
Davoren Park in Adelaide saw house prices rise by 82%, reaching a median price of $465,000.
Similarly, Salisbury East, also in Adelaide, saw unit prices jump by 91% to $464,000.

According to Angus Moore, senior economist at PropTrack, this trend is due to reduced borrowing capacitiespushing buyers towards more affordable locations.
Key takeaway: While rising interest rates have affected borrowing power, affordability remains a key driver of property growth.

If you're looking to invest, focusing on these more affordable suburbs could offer strong returns.

Affordable suburban house in South Australia, highlighting property value growth despite rising interest rates.

First-Home Buyers Are Still Entering the Market – Why Victoria Is Leading

Despite the challenging market conditions, first-home buyers are entering the market at rates higher than the ten-year average. And Victoria is the standout state.

In August 2024 alone, Victoria saw 3089 loans approved for first-home buyers, compared to 2333 in New South Walesand 2076 in Queensland. What’s driving this surge?

Eleanor Creagh, senior economist at PropTrack, says a tighter rental market and government incentives like grants and concessions have encouraged buyers to act quickly.
Victoria’s relatively subdued price growth compared to Brisbane, Adelaide, and Perth has made it an attractive option for first-home buyers.
Key takeaway: If you're a first-home buyer, there are still opportunities to enter the market, especially in states like Victoria where price growth remains moderate.

Auctions Continue to Power Along – More Properties Under the Hammer

Australia’s auction market is showing no signs of slowing down. Last week, 2525 auctions were held across the country, making it the second-highest auction week of the Spring Selling Season.

And that number is set to grow, with 3000 auctions scheduled in the coming weeks.

Sydney recorded a clearance rate of 69%, while Melbourne had a slightly lower rate at 64.8%.
The ACT hit its highest clearance rate since June at 71.2%.

According to CoreLogic, auction activity typically peaks in late November or the first two weeks of December, so we can expect these trends to continue.

Key takeaway: Auctions are still a popular method of sale, and as we approach the peak season, there’s plenty of opportunity for both buyers and sellers to make moves.

Building Costs Continue to Soar – The Impact on Supply

If you're thinking about building a home, brace yourself – building costs are still on the rise. According to CoreLogic’s Cordell Construction Cost Index (CCCI), building costs increased by 1% in the third quarter of 2024.

That may not sound like much, but it can add thousands to the total cost of your new home.

In the year to June, 176,000 dwellings were completed – a staggering 26.6% short of the 240,000 homes needed to meet demand.

CoreLogic economist Kaytlin Ezzy says that while there are 250,000 homes in the construction pipeline, the approval rate for new dwellings remains sluggish.

The Business Council is calling for major reforms to streamline approval processes and boost supply.

Key takeaway: If you're considering building, rising costs and slower approvals mean you may face delays and higher prices. Planning ahead and consulting with experts could help you navigate these challenges.

Next steps: Should you want to learn how the author built his $5m balanced portfolio in 7 years and aspire to own something similar, feel free to get in touch via email at rasti@getrare.com.au or book an appointment here.

Disclaimer: This article is general in nature and does not take into account your situation. You should consider whether the information is appropriate to your needs, and where applicable, seek professional advice from a financial adviser.