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The role of interest rates in the real estate market cannot be understated, especially when it comes to investment properties. In Queensland, Australia, the movement of interest rates has a significant influence on the decision-making process for prospective purchasers of investment properties. This article aims to analyze the relationship between interest rates and investment property purchases in Queensland, highlighting key statistics and factors at play.

KEY MARKET NOTES: (JULY 2023)

  • Despite multiple interest rate rises, high inflation, wage concerns, and indications of slowing economic growth, the Australian housing market continues to show resilience.
  • In the year to date, the combined capital cities have experienced an overall increase in property values of 3.5%.
  • While some experts predict a slowdown in property price growth as new listings enter the market, the supply of available properties for sale remains relatively low compared to historical standards.
  • Sydney’s property prices have seen a slight increase of 0.3% in the past week, a more significant increase of 1.7% in the last month, and a year-to-date growth of 5.9%. However, they are still 3.8% lower than they were a year ago.
  • Similarly, Melbourne’s property prices have shown a minor increase of 0.1% in the past week, a moderate increase of 0.7% in the last month, and a year-to-date growth of 1.0%. Nevertheless, they remain 4.9% lower than they were 12 months ago.
  • Brisbane‘s property prices have experienced a rise of 0.3% in the past week, a notable increase of 1.4% in the last month, and a year-to-date growth of 2.4%. However, they are still 7.0% lower than they were a year ago.

SOURCE: propertyupdate.com.au

Despite economic challenges and rising interest rates, the Australian housing market, particularly in major cities like Sydney, Melbourne, and Brisbane, has continued to exhibit growth. However, it’s important to note that while there have been recent increases, property prices in these cities are still lower compared to the previous year. The interplay between interest rates, economic factors, and housing supply will continue to shape the trajectory of the property market moving forward.

In Queensland, 61% of households were purchasing or fully owned their home, 28.4% were renting privately, and 3.1% were in social housing in 2021. ID COMMUNITY JULY 2023

The Role of Interest Rates

Interest rates have a direct impact on the cost of borrowing funds to finance property investments. When interest rates are low, borrowing becomes more affordable, encouraging potential buyers to enter the market. Conversely, high interest rates can deter investors, increasing the overall cost of purchasing and maintaining investment properties.

Impact on Affordability

Statistics show that lower interest rates enhance affordability for property buyers. According to the Reserve Bank of Australia, as of July 2023, the cash rate stands at 4.1%.

The current cash rate of 4.1% poses difficulties for property investors in Queensland. While it is not excessively high, it represents a notable increase compared to previous lows. This rise in interest rates affects the affordability of investment properties, making it harder for investors to secure financing and potentially impacting their return on investment.

MEDIAN PROPERTY PRICES IN BRISBANE

PropertyMedian priceΔ MoMΔ QoQΔ Annual
Capital city dwellings$725,3971.3%3.0%-8.2%
Capital city houses$806,7811.3%3.0%-9.9%
Capital city units$512,2621.0%3.0%1.5%
Regional dwellings$572,8661.0%2.6%-4.6%

Source: CoreLogic, July 2023

With higher borrowing costs, investors may face challenges in meeting their financial obligations and achieving desirable cash flow from rental income. Additionally, the increased cost of borrowing may limit the number of viable investment opportunities within their budget, reducing the pool of available properties for investment.

Moreover, the rise in interest rates may deter some prospective investors from entering the market altogether. Those who were considering purchasing investment properties may reconsider their decisions due to the reduced affordability and potentially lower returns on their investment.

  • 45.1% of property investors have sold at least one property in the state during the two years to August 2022

  • 19% of investors said they plan to sell property during the next year

  • Queensland’s land tax the biggest motivator

Almost 30% of rental dwellings have disappeared from the Queensland market in just two years, the Property Investment Professionals of Australia (PIPA) Annual Investor Sentiment Survey has found.

The survey has found that 45.1% of property investors have sold at least one property in the state during the two years to August 2022. SOURCE: Property Tribune

Investor Sentiment and Demand

Interest rates significantly influence investor sentiment. Low rates create a positive perception of the market, enticing investors to make purchase decisions with the expectation of higher returns. On the other hand, rising interest rates can cause investors to become more cautious.

The Mortgage Choice Investor Confidence Survey from Q1 2023 revealed that 65% of investors consider interest rates as a significant factor affecting their purchasing decisions.

Higher borrowing costs decrease purchasing power, resulting in decreased demand. This decline in investor demand may lead to a slowdown in the market, potentially stabilizing or even lowering property prices.

Market Stability and Capital Growth

The stability of interest rates is a crucial factor for investment property purchasers. Stable rates provide certainty to investors, enabling them to accurately project their financing costs and expected returns. This stability fosters confidence and encourages investment activity.

Brisbane population growth

Queensland’s state population has returned to its long-run average in Q2, at 2.0%yr, well above the national average of 1.1%yr.

In terms of capital growth, low interest rates tend to stimulate price appreciation. The Real Estate Institute of Queensland reported that in the past five years, median house prices in Queensland increased by 20%, partially driven by favorable interest rate conditions. Conversely, higher interest rates can slow down capital growth, making it more challenging for property values to increase.

To encourage the creation of new rental housing, the Queensland Government has announced a reduction in land tax of up to 50 per cent for build-to-rent developments that include at least 10 per cent affordable rental homes up to 20 years.To encourage the creation of new rental housing, the Queensland Government has announced a reduction in land tax of up to 50 per cent for build-to-rent developments that include at least 10 per cent affordable rental homes up to 20 years. SOURCE: Property Council

The Role of Regulatory Measures

While interest rates play a significant role, it’s important to consider other factors that impact investment property purchases in Queensland. Regulatory measures, such as lending criteria and mortgage stress tests, also influence the purchasing landscape. These measures are designed to ensure responsible lending practices and mitigate the risk of financial instability.