How do interest rate changes affect property prices in Australia?

Channel 1, borrowing capacity: APRA serviceability buffer (rate + 3%) compounds the headline rate move. RBA hikes 50bps → contracted rate hikes ~50bps → tested rate hikes ~50bps. A household previously approved to $1M is now approved to ~$910K. Buyer demand at every price tier shifts down by that gap. Effect visible in auction clearance rates within 6-12 weeks.

Channel 2, investor holding cost: an investor on a $700K IO loan at 6.4% pays ~$44.8K interest/year. At 7.4% (after 100bps hikes) they pay ~$51.8K, $7K more. If rent didn't keep pace + their cashflow gap was already tight, they're forced to either inject more cash or sell. This adds investor stock to the market just as buyer demand contracts, a double-pressure dynamic.

Channel 3, yield-gap math: when a 5-year term deposit yields 4% vs 5.5% rental yield (gross, before costs), property's risk-adjusted advantage is small. Investors at the margin shift capital to TDs / bonds. Owner-occupiers continue buying for shelter motives, so the OO market resists more than IP market.

Lag: full price-impact of a rate cycle is 12-24 months. Fixed-rate borrowers don't feel hike until rollover (most AU fixed terms are 2-3 yrs). The 2022-24 'fixed-rate cliff' demonstrated this, 35% of AU mortgages rolled from ~2.5% fixed to ~6.5% variable across 18 months, mechanically reducing aggregate borrowing capacity + prompting forced sales in the most-stretched cohort.