The impact of rising interest rates on buying Sunshine Coast property

The impact of rising interest rates on buying Sunshine Coast property. As most people know, the RBA further lifted the cash rate this month in line with market expectations, and the cash rate now sits at 4.1 per cent. Rising interest rates play a crucial role in the real estate market, affecting both home buyers and property investors alike. When interest rates rise, it can have implications for those looking to purchase property.

Will rising interest rates cause Sunshine Coast prices to fall?

It is commonly thought that higher interest rates (higher borrowing costs) will reduce buyer demand and cause prices to fall. But looking at historical trends. This is not the case.

In fact, the effect of interest rate hikes on property prices since 1990, and the effect of inflation since the early 1900s, was recently analysed by John Lindeman (one of Australia’s leading property market analysts and regular contributor to Your Investment Property Magazine, among other publications). In Lindeman’s words, “It is clear that interest rate rises only impact a small percentage of property owners, while property prices on the whole rise whenever the rate of inflation increases”.

 

So what impact will interest rate rises have on Sunshine Coast property?

Here are 4 ways in which interest rates rises may affect Sunshine Coast property buyers and the Sunshine Coast property market:

1. Increased mortgage repayments may force a small number of property owners to sell if they can’t continue to afford the repayments.

There is much talk of many Australians facing the “mortgage cliff” (coming off low fixed rates and on to higher 2023 variable rates) over the next 6 months.

Currently, this is unlikely to be the case for many Sunshine Coast home owners though, as the majority of borrowers are likely to be able to absorb the interest rate rises. Looking at the most recent ABS Census for Noosa (which was done in 2021, so worth remembering that there have been many consecutive rate rises since that period):

• approximately 49% of homes were reported as being owned outright, with no mortgage
• 23.6% of homes were owned with a mortgage
• 15.3% of households reported at that time their mortgage repayments were greater than 30% of the household income.

It could be considered that if rate rises do have an impact, it will only be those 15.3% who may be more affected (although that percentage may have changed given the consistent rate rises over the last year). This doesn’t also factor in equity or offsets that homeowners may have to help absorb the rising interest rises. Many other areas of the Sunshine Coast were similar.

So using this data, it could be considered unlikely that there will be a wave of households having to sell their Sunshine Coast properties in these areas due to mortgage stress. In addition, according to S&P Global Ratings’ quarterly market overview for March 2023 mortgage arrears overall in Australia as a whole was only at 0.95 per cent for the quarter.

The increased mortgage payments will most affect owners who may be on low incomes and have low equity and were already contributing 30% or more of their income to mortgage repayments before the rate rises.

2. Reduced demand for Sunshine Coast property

When we experience rising interest rates, it can reduce the demand for Sunshine Coast properties and also reduce the borrowing capacity for some borrowers. Higher mortgage rates deter some potential buyers from entering the market, prompting them to delay their purchasing decisions or to look at more affordable properties. On the Sunshine Coast, we are seeing a decrease in the number of buyers competing for properties, which is leading to a more balanced market in some areas between buyers and sellers.

This shift in demand can lead to a slowdown in property price appreciation, which we are seeing in a number of parts of the Sunshine Coast market, longer days on market but not necessarily lower property prices given the continued shortage of supply of good quality homes.

3. Profitability of rental properties for investors

For property investors, rising interest rates can present both challenges and opportunities. Higher borrowing costs may affect the profitability of rental properties, especially if rental income doesn’t keep pace with increased mortgage payments.

However, the widespread shortage of rental supply in some cases is driving potential rental rate increases currently. It’s important for property investors to carefully assess the impact of interest rate changes on their cash flow and investment strategies.

4. Rising interest rates in context

If you look at the long-term impact of rising interest rates and property, you can see that interest rate rises haven’t impacted the property market as many people expect. It may be other factors that will impact prices – employment being the most significant one, and if unemployment rises then we may be in a very different situation.

Conclusion

Rising interest rates have a multifaceted impact on property buying. Affordability, demand, property prices, refinancing options, and investment considerations are all influenced by changes in rising interest rates.

But while interest rate hikes raise concerns, market dynamics and future catalysts for growth (migration, Olympics, etc) indicate that the medium to long-term outlook for Sunshine Coast property continues to be strong.

You need to consider your own personal circumstances and objectives when looking to buy. If you do need advice on buying on the Sunshine Coast, we’re always here to help.