Several market factors created a perfect opportunity for the Australian housing market to thrive despite how the pandemic impacted the economy — but with impending interest rate hikes, the market could potentially make a sudden turn.

In NAB’s National Housing Market Update for March, CoreLogic director of research Tim Lawless said housing values have grown at such a high and surprising rate amid a period of low-income growth.

“Since the onset of the pandemic in March 2020 Australian housing values have risen by 24.6% adding, roughly $144,000 to the value of an Australian dwelling,” he said.

Some of the factors that have boosted the market include record-low interest rates; improved affordability following the downturn between 2017 and 2019; surge in household savings; tight supply-demand dynamics; government incentives; and positive housing sentiment.

“However, each of these factors are losing their potency to drive housing values higher.”

Australia’s median dwelling prices, despite clocking their 17th consecutive month gains in February, has been witnessing a growth slow down since April 2021.

In fact, the 0.6% gain in February was the lowest monthly growth reading since October 2020.

A major headwind currently in the market, Mr Lawless said, is the increases in interest rates.

Since early 2021, major banks and other lenders started to increase their fixed rates in anticipation of a potential rate hike by the Reserve Bank of Australia, with sharp hikes announced toward the end of the year.

While some lenders reduced their variable rates, the trend is likely to reverse once the RBA moves the needle to increase the rate hike for the first time in more than a decade.

The RBA last introduced a rate hike in November 2010, bringing the cash rate to 4.75%. Since then, cash rates have been trending lower and have reached a historic low of 0.10% a decade after.

“While mortgage rates are expected to remain well below average for an extended period of time, households are likely to be more sensitive to a higher cost of debt, considering housing debt ratios are at record levels,” Mr Lawless said.

According to the Australian Prudential Regulation Authority (APRA), around 24.4% of new residential loans lodged over the last quarter of 2021 had a debt-to-income ratios of six times or higher.

“Housing affordability has been eroded by the high rate of growth in dwelling values alongside low income growth,” Mr Lawless said.

Housing values have increased by 22.6% between March 2020 and December 2021 while wages only grew by 3.3%.

“Measures of housing sentiment have been reducing since November 2020, reflecting a mix of affordability challenges and rising mortgage rates,” Mr Lawless said.

“More broadly, consumer sentiment could be further negatively impacted by Russia’s invasion of Ukraine, triggering a new wave of global uncertainty.”

Will there be enough upsides to counter a sharp downturn?

Despite the several factors potentially putting a stop to the surprising boom, Mr Lawless said several upsides will be able to insulate the market from a sudden downturn.

For instance, while demand will likely slow among locals in some markets due to the rise in interest rates, the opening of domestic and international borders could provide support.

“While a return of overseas travel is not expected to boost home buying demand immediately, we are expecting stronger rental demand in key areas such as inner city precincts popular with foreign visitors and students,” he said.

Furthermore, improving economic conditions and the expected higher wage growth would soften the blow on housing demand and limit the number of distressed property sales.

“Hopes that 2022 would deliver more certainty and less disruption are looking far-fetched at the moment, with the east coast of Australia encountering record levels of rainfall and extreme flooding, the invasion of Ukraine stoking global uncertainty, and prospects for higher inflation and wages growth potentially forcing interest rates higher,” Mr Lawless said.