The Australian housing market has shown notable resilience in the face of rising interest rates. Since the start of the rate-hiking cycle in May 2022, national home values initially fell by 7.5% until January 2023. However, following this low point, home values began to recover, rising to 4.6% above their May 2022 levels by November 2023, despite five additional cash rate increases during this period.

Reasons for Continued Growth:

1. Low Supply vs. High Demand: The market has faced low housing supply relative to demand. Factors such as a tight Labor market, accumulated pandemic savings, and strong population growth have supported mortgage serviceability, reducing the need to sell properties even as borrowing costs rise.
2. Buyer Composition: Current buyers tend to have larger deposits, making them less reliant on debt compared to those purchasing during previous low-rate periods.
3. Variable Rate Mortgages: A significant portion of mortgages in Australia are variable rate. Many buyers may anticipate a future reduction in cash rates, believing they are purchasing near the peak of the rate cycle, which can sustain demand despite higher rates.

Potential Effects of Another Rate Rise:

• Demand Slowdown: If rates increase again, it could dampen buyer enthusiasm, signalling that rates may not have peaked yet, which could lead to a decline in market activity.
• Shifts in Market Dynamics: While home values rose by 1.8% in the June quarter, this rate of growth is slower compared to the 3.3% rise in the same quarter the previous year, indicating a potential weakening in demand.
• Regional Variations: Growth has been concentrated in more affordable markets, such as Perth and Adelaide, where demand is robust. Another rate rise could further shift buyer interest towards these regions as affordability constraints tighten in higher-priced markets.

Conclusion: Even without additional rate increases, the housing market is likely to face headwinds as economic conditions weaken and affordability becomes a more pressing issue. Overall, another rate rise could slow the momentum in home values and shift buyer dynamics, leading to a more cautious market outlook.