Why house prices increase and decrease

We all know that house prices are going up. We wince and moan to ourselves when we look at our local real listings in the estate agent ‘s window. Then, we draw conclusions and say think that economy must be broken, or that there’s some grand conspiracy from investors to jack up prices. 

Well, that’s the exciting way to look at it, but in reality, it’s a bit more complex. Prices are governed by unseen market forces: It’s the culmination of desires and behaviours of individuals (and organisations) making thousands of choices a day. 

Housing prices: A tale of supply and demand 

There are two actors in the tale, us (the buyers) and the banks (lenders). Both actors make decisions that affect the other and result in the eventual pricing of houses. These two actors all live in a town called ‘The Market’. The Market’s weather is unpredictable, sometimes it’s sunny for years, and other times it seems like it’s endlessly storming. One thing’s for sure; whatever the weather may be, it never lasts forever. 

Because houses are expensive, most buyers will have to take out a loan to purchase one. They will have to intentionally go into debt. There is only a limited supply of money the banks can lend, so this puts a limit on the number of buyers who are able to get a loan. There is also a limited supply of land. It’s like a see-saw with supply on the left and demand on the right. If one side tilts, the other side much also tilt, but in the opposite direction. 

When more buyers enter the housing market, banks will start to regulate the number by increasing interest rates. This is a push to bring the market back to equilibrium.

What is interest? Simply, it’s the cost of borrowing money which also acts as an incentive for lenders to approve loans. 

What affects your interest rates

There are a few forces that affect the interest rates on your home

Supply and demand

The more credit a bank has, the lower the interests rate, the more debt a bank has, the higher the interest rate. The bank’s primary way of generating credit is by customer making deposits, aka (savings). When the bank has limited credit, interest goes rates.

Inflation

Inflation is like that saying: A rising tide lifts all boats. The average inflation rate for the Australian economy is 2%. All business and consumers have to keep up with inflation, and the higher the inflation rate, the higher interests rates are likely to be.

Government

The Reserve Bank of Australia plays a role in how interest rates are set. When they buy securities in banks, the banks have more credit and interest rates come down, when they sell those securities, the banks are drained of credit and interest rates go up. 

Mortgage House 

Finding a low-interest rate for your home is a great thing. But, before you judge banks for the increasing interest rates, remember that there is a number of forces affecting interests rates. Interest, itself, is a good thing. It encourages the economy to keep growing by promoting buying, selling and lending. 

 

At Mortgage House, we’re no strangers to the first homeowner’s journey. Our expert Lending Specialists take the time and care with setting you up with the home loan that suits your needs. If you’re thinking of applying for your first home loan, you can Apply Online today to get started!