Let me demonstrate how the combination of low interest rates and extended loan repayment periods are working against you to ever afford your  by using an online calculator. (This one is by Canstar)

Let’s say Michelle is earning $80,000 a year and has a $100,000 deposit saved. Interest rates are 7.7% and the loan term is 25 years. Taking into consideration Michelle’s expenses the bank says she can borrow $311,000. Therefore assuming no stamp duty is payable she can purchase a home for up to $411,000.

Michelle decides not to buy as she wants to travel instead. Five years pass and Michelle is now ready to buy a home. Interest rates have dropped down to a record low of 2.7% and the bank now allows repayments over 30 years. Her deposit, income and expenses are the same. She is thrilled when told she can borrow $533,000 and buy a home for up to $633,000. But when she looks at what she can buy for her money she discovers that it is the same as five years earlier but it now costs $222,000 more, and will take longer to pay off.

Michelle is not the only one that can borrow more, EVERYONE has access this higher borrowing capacity and so it pushes up prices for everyone.

Now here is why I would prefer a higher interest rate. It would have the reverse impact on the above in certain markets. It is a more complex conversation to explain why it would only slightly reduce prices but it would certainly reduce access to money and therefore what people are able to spend.

Also with a higher interest rate you are rewarded more for making extra repayments and have the chance to pay off your home sooner and save interest costs. With lower interest rates the benefits are diminished.