The Reserve Bank of Australia (RBA) increased interest rates by 0.25%. This is the fourth increase by the RBA since October 2009. In the developed economies of the world the Australia Reserve Bank in the leading bank which is increasing interest rates. US, UK and most of Europe have not had an increase in Interest Rate for over 18 months. US in fact does not look like increasing its rates for another 6 months at least.

The Important question is what impact will the Interest rate hike have on property prices in Australia. Real estate prices in Australia increased an average of 10% in 2009 when the rest of the World was in a recession due to the Global Financial Crisis. During this time towards the later end of 2009 the interest rates were increased 3 times. The Interest rate hikes in 2009 have not effected property prices from increasing.

Similarly I dont think the latest interest rate rise by the RBA will have any impact on property prices. To understand this clearly it needs to determined why the property prices are increasing. The two main reasons for the continuing increase in real estate prices in Australia are:

1. Shortage of New Housing Construction. It is mentioned by economists that 40,000 fewer homes are being built every year in Australia compared to demand. Collectively in the last 5 years this shortage has grown and currently the shortage of dwelling is around 150,000. With banks not overly keen on lending for commercial properties to developers and builders this shortage will continue for the medium term. With residential mortgage lending getting difficult due to the banks attitude and the increasing interest rates a lot of families are unable to get a loan to purchase a property.

2. Migration levels into Australia average around 160,000 new migrants per year for the last 3 years. This period has seen the highest levels of immigration into Australia. Amazingly in the last few years the Australian Birth rate has risen above 0% to be around 2.5% which is amongst the highest in the last 30 years (thanks to John Howard and the baby bonus). So Australian natural population is growing faster than ever plus the migrants coming to the country are amongst the highest ever.

The two reasons above explain why the property prices will continue to rise in Australia for the foreseable future.

Any further and deeper Global Economic crisis can turn things around or the aggressive attitude of the RBA can lead to the Australian Economy going into a tailspin (which is highly unlikely in an election year)

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