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Population Growth May Have a Greater Impact on Housing Prices than Rising Mortgage Rates

One of the critical factors that affect the housing market is mortgage rates. Typically, when mortgage rates rise, the cost of borrowing increases, which can lead to a decline in demand for houses. This, in turn, can result in a fall in house prices.

However, a new report has challenged the conventional wisdom that rising mortgage rates have a significant impact on house prices. While a 1% increase in mortgage rates has raised fears of falling house prices, the report argues that population growth is likely to be the primary driver of long-term housing price support. According to the report, a 1% increase in Australia's population leads to a cumulative long-term increase of 8.18% in house prices.


The Australian government has committed to significant population growth, particularly for skilled immigrants, which has resulted in projections of increased demand for housing. Net overseas migration has also rebounded faster than expected after the pandemic, and it is expected to reach around 200,000 per year by 2022/23. This will result in a total population growth of 1.2% over the same period after a sharp decline to 0.2% in 2020-21.


While house prices are influenced by many factors, the report suggests that a 1% increase in mortgage rates would result in a 1.3% fall in Australian house prices. However, this could vary depending on the market's affordability. The report also found that house prices react to changes in mortgage rates within the same quarter, whereas population growth has a cumulative longer-term effect.


Some argue that mortgage rates would have a more significant impact on prices than population if enough extra dwellings were built quickly and at a low cost to accommodate the extra demand. However, housing construction in Australia has not kept pace with demand growth, resulting in a decline in the housing stock relative to the adult population over the past 20 years.


In summary, while rising mortgage rates have a short-term impact on housing prices, population growth is likely to have a greater impact on long-term housing price support. With the Australian government's commitment to significant population growth and the expected rise in demand for housing, prices in the property market are likely to increase. However, it is also essential to address the mismatch between housing supply and demand to ensure the long-term sustainability of the housing market.

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