Another Rate Rise to Test the Property Market

The Reserve Bank’s decision to lift the cash rate by another 0.25%, to 4.1%, will inevitably add further pressure to an already cautious property market.

While the move was widely anticipated, it reinforces the reality that borrowing costs are rising, and that is beginning to influence both buyer behaviour and seller expectations.

In Melbourne, we started to see the early impact of the previous rate rise play out through February, particularly in the auction market.

As auction volumes fluctuated around public holiday disruptions, clearance rates have been trending lower as buyers become more conservative about borrowing and future mortgage repayments. 

Across the capital cities, around 2,871 homes went under the hammer in the week ending March 15, with 1,389 of those in Melbourne. That’s a 144% increase on the week before, which was hampered by the Labour Day long weekend in Victoria.

Auction volumes are now about 16% higher than the same time last year, suggesting sellers are continuing to bring property to market despite the more uncertain economic backdrop. 

However, the more telling signal is coming from clearance rates. On the weekend just gone the preliminary clearance rate for the combined capital cities was 66.6%. The week before things were a little brighter with a preliminary clearance rate of 72.1% but that was revised down to a final figure of 57.9%.

In Melbourne, 66.9% of auctions reported a positive result over the weekend, while a week ago the preliminary clearance rate came in at 67.9% before being revised to 52.6%, the weakest rate since mid-December last year.

What we are seeing is a typical response when interest rates move higher. The first impact tends to show up in auction competition and clearance rates as buyers reassess borrowing capacity. Over time, if borrowing power remains constrained, that moderation often flows through to price growth.

Housing value data is already hinting at that shift. Melbourne dwelling values were flat through February and down slightly over the rolling quarter, suggesting the market is in a period of consolidation.

Adding to the uncertainty has been a rapid shift in expectations around the interest rate outlook.

Only a few weeks ago, many economists expected the Reserve Bank to pause for several months. However, the big four banks have since revised their forecasts, tipping another potential rate rise in May as global inflation risks increase.

In my view, however, the most likely timing for the next move remains later in the year. The Reserve Bank will want more time to see how global factors, particularly rising energy prices linked to instability in the Middle East, flow through to inflation and household spending. A further rate increase around July appears more plausible.

If that occurs, it will likely reinforce the trends we are already seeing in the market.

Higher interest rates reduce borrowing capacity and tend to narrow the pool of buyers able to compete at higher price points. That typically results in softer auction competition and a period of price stagnation while the market recalibrates.

At the same time, the cumulative impact of higher mortgage repayments is beginning to affect household decision-making.

For some families, particularly those who purchased or refinanced during lower rate periods, the increase in repayments is starting to reshape financial plans. In certain cases, we are seeing homeowners bring forward selling decisions to reduce debt or move to a more manageable property.

Despite these pressures, Melbourne’s property market has historically proven remarkably resilient. We’re seeing that firsthand at Woodards, with our February sales volume 40 per cent higher than the same time last year.

Population growth, limited housing supply and strong long-term economic fundamentals continue to underpin demand for housing. While interest rate cycles inevitably create periods of slower growth, they are also part of the normal rhythm of the property market.

For buyers and sellers alike, the key message right now is preparation.

If rates do rise again later this year, the market may become more selective, but opportunities will still exist for those who are well informed and well positioned.