1 . INTEREST RATES
House prices are highly correlated with interest rates at a national level . Not surprisingly , as it becomes more expensive to pay off a loan , people can borrow less . Once you move beyond aggregates however , there are often other drivers that override this . Overall , Sydney and Melbourne are the most sensitive to interest rate changes primarily because of high debt levels . In more affordable locations , the link is a lot weaker .
2 . ACCESS TO FINANCE
Restrictions to finance also slow down property markets . Right now , restrictions to finance are relatively low . In anticipation of increasing rates , the Australian Prudential Regulatory Authority ( APRA ) increased the interest rate buffer on mortgages last year - when lenders assess new borrowers ’ ability to meet their loan repayments , they must show they can pay at an interest rate that ’ s at least three percentage points above the loan product rate . Similarly to interest rates , Melbourne and Sydney are far more sensitive to finance restrictions .
3 . ECONOMIC GROWTH
In a strong growth economy , people are less worried about losing their jobs and when it comes to housing , their ability to pay off their loans . As a result , sentiment towards housing tends to be stronger . We ’ ve seen this most recently following the start of the pandemic . Although initially house prices declined , once it became apparent that the economic downturn would be short lived , prices bounced back quickly .
4 . POPULATION GROWTH
More people need more housing so population growth unsurprisingly results in house price rises . The evidence on this is most striking in small regional towns when there is some form of economic stimulus . The opening of a new mine , for example , can dramatically increase house prices , similarly very strong growth in tourism can have a similar effect . With international borders reopening , population growth is set to get back to more normal levels and this will keep pressure on housing demand .
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