We've all heard about the RBA's interest rate increase announcement and it comes as no shock that a lot of Australian's are worried. Here is my take on the situation.
Housing prices are linked to consumer confidence. As confidence leaves the market, so do buyers. What we are likely to see due to rising interest rates is a domino effect, but it may take 2-4 months to flow through to the market.
As interest rates rise, the ability of buyers to borrow as much money may drop. As the budget of a buyer drops, so will the demand for homes in that particular price bracket, as that buyer can now only afford a cheaper home.
Add to this, buyers that are yet to buy and haven't found a home may need to go back to their bank as their pre approval expires. For some buyers, that bank will reassess their ability to service a loan. For some, with increased interest rates, the bank may not be willing to lend them the same amount, it may be less. So buyers will start to be priced out of the market if their borrowing capacity has reduced.
So we will see buyers now shopping with reduced budgets. This obviously then has a knock on effect to house prices, as buyers can no longer spend the same amount to buy a house. House prices may therefore drop as a result.
In the shorter term, over the next two months, buyers that are pre approved would be wise to keep looking with the budget that they have today. As their budget may be less tomorrow. Likewise for sellers.
Now is the time to be selling, whilst you still have buyers in the market with today's budget, not a reduced budget in three months time.