War-induced interest rate shocks unlikely to upset Asia’s property markets

Last week, the energy shock caused by the war in Iran showed signs of becoming a full-blown financial and economic crisis. The attacks on energy infrastructure across the Middle East, coupled with soaring prices of crucial refined petroleum products such as diesel and jet fuel, forced investors to start pricing in a prolonged disruption to supply and a contraction in demand. Even if the Strait of Hormuz reopens sooner than anticipated, the scale of the damage to energy assets in the Persian Gulf means production and exports will take much longer to return to normal than previously assumed. Rory Johnston, an oil analyst, said the effective closure of the strait had already caused a reduction in global oil supplies of 20 million barrels a day, far exceeding the predictions of 3 million a day at the time of Russia’s invasion of Ukraine in 2022, which proved too pessimistic. Faith Birol, the head of the International Energy Agency, recently said the Iran war was the “greatest global energy security threat in history”. Bond investors fear the inflationary consequences of the supply shock will force many leading central banks to raise interest rates, dashing expectations of further reductions in borrowing costs. In a sign of the abruptness of the shift in market sentiment, traders are assigning a 50 per cent probability to a US interest rate rise by October, compared with expectations of reductions before the war erupted. In Asia, which is highly exposed to supply disruptions due to heavy reliance on energy imports from the Gulf, the move towards tighter monetary policy is more advanced. Last week, the Reserve Bank of Australia (RBA) increased interest rates for the second straight month, joining the Bank of Japan in the region’s monetary tightening camp. On March 18, Citigroup said it expected the Bank of Korea (BOK) to increase borrowing costs by half a percentage point this year because of the more “pronounced impact” of higher oil prices on inflation. Monetary tightening presents a challenge to Asia’s property markets. Lower interest rates have helped commercial property transaction volumes recover and have also contributed to the strong performance of housing markets. According to a CBRE investment survey in January, tighter monetary policy was among the biggest challenges faced by investors in the Asia-Pacific. Yet it is important to put the threat posed by higher interest rates into perspective. A report by JPMorgan earlier this month on Hong Kong drew attention to the tenuous link between movements in interest rates and the performance of housing markets. JPMorgan noted that house prices in Hong Kong rose 13 per cent during the Federal Reserve’s tightening cycle from 2004-06 and 20 per cent when the Fed increased interest rates from 2016-18. Domestic determinants of property values in the city, notably tight supply and a buoyant equity market, proved more consequential. While supply and demand dynamics are not as favourable, the revival of the city’s capital markets and the influx of mainland Chinese professionals and students are helping to underpin a recovery in rents and prices. Idiosyncratic drivers of housing market performance are also evident in Australia. Despite the sharp rise in interest rates from 2022-23, a short-lived downturn helped prices and rents reach new highs. Average prices in the capital cities have risen a further 16.6 per cent since the start of the RBA’s tightening cycle in 2022, according to data from Cotality. Although the resumption of interest rate rises is dampening demand in the popular markets of Sydney and Melbourne, it is fuelling competition for homes in more affordable capitals and regions that “still have big supply deficits which are offsetting falls in demand”, said Eliza Owen, a Sydney-based independent housing market analyst. Not only is a tighter monetary policy unlikely to stop prices rising, it is also causing affordability pressures to spread deeper into Australia’s mid-sized capitals, such as Perth and Adelaide, where house prices are up 22 and 11 per cent respectively over the past year. In South Korea, the impact of the BOK’s interest rate increases pales in comparison to the ineffectiveness of successive rounds of cooling measures. An excessive focus on demand-side policies, strict curbs on mortgage lending and punitive taxes have angered buyers and sellers while doing little to lift supply. Seoul’s flat market, where prices have risen uninterruptedly since 2025, has become highly politicised. South Korean President Lee Jae Myung has pinned the blame for the sharp deterioration in affordability on investors and has pledged to restore a hefty capital gains tax on owners of multiple properties. Yet unless the government is able to boost supply, policymakers will struggle to take the heat out of the market. Another reason interest rate increases are unlikely to upset Asia’s housing markets is that they may not materialise or will be relatively modest. Central banks can do little in response to a major energy shock. While bond markets are pricing in rises in borrowing costs, central banks are in a wait-and-see mode. Soaring energy prices could cause a recession as well as inflation. In Japan, the trade-off between inflation and weaker growth is now more acute. Construction costs are likely to keep rising, exacerbating the supply constraints that are driving up property values, especially in Tokyo. Asia’s housing markets face daunting challenges. While monetary tightening would add to affordability pressures, it would have little bearing on the forces driving up prices and rents.

War-induced interest rate shocks unlikely to upset Asia’s property markets

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}While monetary tightening would add to affordability pressures, it would have little bearing on the forces driving up prices and rents

While monetary tightening would add to affordability pressures, it would have little bearing on the forces driving up prices and rents