Same interest rates, wildly different house prices
Why housing growth is structural, not cyclical
Synopsis
After the RBA’s first rate hike, housing crash calls have predictably resurfaced - assuming price falls will be fast, deep and uniform nationwide. That assumption is wrong. Interest rates don’t set prices. Markets diverge because fundamentals differ: population, jobs, wages, supply and demographics. Housing doesn’t crash or boom in unison.
Introduction
After the RBA’s first rate hike, the housing crash narrative has predictably resurfaced.
Once again, we’re told prices are about to fall - quickly, deeply, and more or less uniformly across Australia. The logic is familiar: higher rates reduce borrowing power, therefore house prices must fall.
It sounds neat. It sounds intuitive. And it’s mostly wrong.
Interest rates influence housing markets, but they do not set prices. They shape behaviour at the margin - who can borrow, who steps back, who delays selling - but they do not explain why some markets surge while others stall, even when facing identical mortgage rates.
We’ve just lived through the clearest real-world test of this idea.
Since late 2019, cash rates have lifted from near zero into the mid-4s - over 400 basis points of tightening - and mortgage rates are roughly 2% to 2.5% higher than they were before. If higher rates were enough to drive prices lower, that tightening cycle should have done the job.
Instead, we saw wildly different outcomes. The most recent data shows smaller capitals such as Brisbane, Adelaide and Perth have registered stronger annual house price growth compared with Sydney and Melbourne, reflecting divergent local conditions rather than a uniform national cycle.
Same interest rates. Same lending rules. Same buffers.
If housing were driven primarily by interest rates, these outcomes should look far more similar. They don’t - because housing markets are structural, local and fragmented, not national and uniform.
Listen
Cheap doesn’t mean clever
This brings us to one of the most persistent myths in property commentary: that cheaper markets are automatically better buys.
They aren’t.
Affordability can be a necessary condition for growth, but it is never a sufficient one.
Plenty of cheap areas stay cheap for decades. Others spike briefly and then go nowhere. Only a small number genuinely re-rate - and only when deeper fundamentals align.
Property spruikers love affordability because it’s easy to explain. “Sydney is expensive, therefore regional town X must boom next.” That logic ignores why some places attract people, capital and jobs - and others don’t.
What actually drives housing growth
For a market to boom - or even deliver sustained above-average growth - multiple forces need to move together.
Here are the seven indicators I keep coming back to.
1. Population growth
A boom market must attract more people in absolute terms. My rule of thumb is simple: if population growth lifts 10% or more above its prior 10-year average, that box gets a tick. Percentage gains off tiny bases don’t count.
2. Employment growth
Not employed residents but local job creation. Hospitals, universities, defence, research hubs, specialist trades and advanced manufacturing generate durable housing demand. One-off construction projects and tourism surges rarely do.
3. Real wages
Wage growth only matters once inflation is stripped out. Markets with rising real local incomes can absorb higher prices without stalling. This is why areas anchored by health, education and high-skill industries consistently outperform.
4. Tight supply
Boons don’t happen with excess stock. Under three months of effective resale supply places upward pressure on prices. Rental vacancy below 2% pushes rents higher. On the new-build side, commencements matter more than approvals - persistent undersupply lifts values and yet so does new housing supply give the high and still rising construction costs.
5. Undervalued housing
Most booms start locally. Rising renovation spend, knock-downs and increased local investor activity are early signals. Locals understand value long before outsiders do. If locals aren’t buying, ask why. Booms sourced from imported buyers often fall harder than home grown ones.
6. Demographic mix
Downsizers can lift prices - briefly. Sustained growth needs younger buyers and upgraders as well. As people age, they typically spend less on housing, not more. Without churn, growth stalls.
7. Education
And on a more local scale, when enrolment supply is tight, access to strong schools creates price premiums. Enrolment growth and catchment pressure produce micro-markets that outperform their surroundings.
The X-factor still matters
Every major boom has something extra - an X-factor.
Past X-factors include: Overseas capital. Resource cycles. Pandemic-era policy settings. Migration shocks. Major events.
These forces are unpredictable and rarely repeat at scale. The Covid convergence was extraordinary and extremely unlikely to be replicated for decades. Expecting another post-Covid style surge is wishful thinking.
Revisit
And how interest rates really fit in
Interest rates don’t drive prices, but they cap behaviour.
As outlined in a recent Missive a 0.50% rise in mortgage rates typically reduces borrowing capacity by around 8% –10%, depending on borrower type. But housing prices don’t fall by anything like that magnitude.
For example a 0.50% rise in mortgage rate might shave a few percentage points - between 1% and 2% tops - off the generic housing market’s potential growth.
Instead, the adjustment happens through behaviour. Some marginal buyers step away altogether, while others trade down in size or location. Existing owners become more reluctant to sell, preferring to sit tight rather than accept a softer price. Turnover slows, listings thin out, and transaction volumes fall.
The result is not a sharp price correction, but a market that increasingly locks up. Growth flattens, momentum fades, and prices tend to drift rather than collapse.
That is how housing markets actually respond to tightening cycles and it is exactly what history keeps showing us, regardless of how confident the crash predictions sound after each rate move.
Property “Find. Fund. Develop.” Event on Sat 7 + Sun 8 March, Burleigh Heads, Gold Coast
I’m speaking at the upcoming Find. Fund. Develop. event hosted by Unemployable Property - and it’s two full days of real-world deal analysis, funding strategies and development frameworks. No fluff. No BS theories. Just what actually works. If you’re serious about property, this is where you need to be.
I have even been tasked to answer “If I had 10 million smackaroos what type of housing would I develop and where would it be.” Well there might be some fluff and BS afterall!
This is a new layer to the Matusik Missive. Yes, it’s a paid offering - but it’s designed to give you more, not to plead for a donation. Subscribers can ask questions directly, which I bundle and answer several times each month in paid-only posts. My aim is to explain what’s going on, not what you want to hear. If that appeals, come on in and let’s get the Q&A started.
And some smartalec might even ask me what I would do with those $10 million big ones.
