SYDNEY: Rising interest rates will weigh on property prices and curb borrowing, but there’s “considerable uncertainty” about the size and timing of their impact on the local housing market, a senior official of the Reserve Bank of Australia (RBA) says.

The RBA has lifted its cash rate by 2.25 percentage points since May as it seeks to rein in inflation.

That scale of tightening is estimated to cut maximum loan sizes by about 20%, Jonathan Kearns, the central bank’s head of domestic markets, said in Sydney yesterday.

“Because higher interest rates reduce borrowing capacity and increase loan repayments, they typically result in a decline in new housing borrowing,” he said.

“The timing and strength of the relationship between interest rates and housing borrowing can vary.

“This is least because the factors driving interest rates, such as income growth, can also directly affect housing demand.

“But there is no doubt that interest rates are an important determinant of housing finance.”

Australian home-price falls have accelerated since the RBA began its sharpest policy tightening in a generation.

Sydney, the bellwether market, has unsurprisingly led the declines, while at a national level, prices are dropping at the fastest pace since 1983.

According to Kearns, RBA research found that the most expensive areas’ values are the most sensitive to rate changes.

“This matches the observation that housing prices in more expensive locations are more cyclical,” he said.

 - Bloomberg