Rates rise and property prices fall, but you're not as screwed as you think | finder.com

It's a scary time to be buying a home, but there's always a silver lining.

by Richard Whitten

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Property prices rose to dizzying highs in 2021, with record low interest rates fuelling the borrowing frenzy. And now it's all starting to turn the other way.

Interest rates are soaring, and so is the cost of living. Property prices are beginning to drop in many parts of the country.

Naturally, buyers are starting to worry. No one wants to borrow a huge amount of money to buy a house only to get hit with interest rate hikes while your property falls in value. According to Finder's Consumer Sentiment Tracker, just 32% of Australians think now is a good time to buy property.

But it's not all doom and gloom. While many economists are predicting further interest rate rises and big property price falls, several property experts told Finder that there are silver linings for some buyers.

Property markets entering a difficult new phase but not a crash

"We have now entered the next phase of the property cycle, one where the market is cooling and prices are adjusting," says property expert Michael Yardney. "And while property prices will correct in some locations, there will not be a property 'crash' as some commentators are predicting."

"Some who recently purchased a property and haven't experienced market cycles will find the current market conditions are concerning."

Buyer's advocate Cate Bakos says that even while conditions are getting more difficult, most borrowers "have the fiscal capacity to sustain a loan at this [increasing] rate" because lenders assess loan applications based on the assumption of higher interest rates.

"All residential loan applicants are now being credit-assessed well above 6%." Rising rates combined with more expensive fuel, groceries and other costs are already hurting, but many borrowers are ahead on their home loan repayments.

Upsides for some buyers and investors

Higher costs and falling prices sound like a bad combination for property investors, but this might be completely wrong because rents are rising. "Many investors are experiencing more optimal cashflows now due to the sheer increase in asking rents and the limited vacancies," says Bakos. "The rate of rent increases is likely to eclipse the cost of increased interest rates."

This is bad news for renters, especially those trying to save a deposit. But falling prices can work out well for these buyers too.

"While everyone is worrying about the potential rises and wondering if they should wait for a drop in prices, there could be an opportunity to negotiate a bargain," says mortgage broker Rebecca Jarrett-Dalton.

"If you're sensible, conservative, in for the long run and a good negotiator, it could be time to snag a bargain right now."

Inflation and housing supply are key factors

Property prices tend to fall when interest rates rise. Buyers just can't afford to borrow as much. And now people are spending more on food and groceries too.

"We all know what it costs to fill a petrol tank or buy a lettuce right now, which is making interest rate changes hurt all the more," says Jarrett-Dalton. "The hope is that grocery prices will return to normal as the impact of the floods is further behind us. This and the shipping challenges all settle down so we can more gently ride the interest rate wave."

But supply and demand are important factors too. Home building activity is slowing. "This could impact the supply and demand imbalance and place upward pressure on prices," says Bakos.

"Property owners should remember that property values are once again going to rise substantially over the long term," says Yardney, "Underpinned by our rising population at a time of significant undersupply of properties and rising immigration."