When most people think about what drives property prices, interest rates are usually top of mind. It makes sense on the surface: when interest rates drop, borrowing becomes cheaper, and buyers flood the market. But while this correlation is often true in the short term, it's not the full story.
To understand what truly drives long-term property prices, we need to look beneath the buildings — to the land they sit on.
The Interest Rate Myth
It’s undeniable that interest rates affect buying power. According to the Reserve Bank of Australia (RBA), a 1% drop in interest rates can increase borrowing capacity by up to 10% for some buyers[1]. This often results in a short-term bump in demand.
But interest rates don’t build wealth. They don’t generate scarcity. And they don’t add intrinsic value to a piece of land.
That value — and the long-term capital growth that comes with it — comes from something more foundational: the land itself.
Land Is the Scarce Resource — Not the House
Unlike buildings, land cannot be manufactured. The supply is fixed, especially in desirable, infrastructure-rich urban areas. As the economist Henry George famously argued in the 19th century, land value increases not because of what the owner does, but because of location and community-driven improvements[2].
Houses depreciate. Land appreciates.
This concept is well documented in land economics and property valuation theory. Numerous studies have confirmed that, over time, land typically accounts for the majority of a property’s value growth — not the dwelling itself[3].
What Drives Land Value?
The answer: supply and demand.
But unlike manufactured goods, land supply is heavily influenced (and restricted) by government policy — namely zoning, planning, and infrastructure provision.
1. Town Planning and Zoning
Governments determine where housing can be built and at what density. This creates artificial scarcity. For example, rezoning farmland to residential instantly increases land value — not because the land changed physically, but because the government changed its rules.
Rezoning decisions are made years, often decades in advance, based on infrastructure planning, population projections, and political strategy. In Sydney, for example, the NSW Government's Strategic Planning Framework guides rezoning decisions with a 20+ year horizon[4].
2. Infrastructure Investment
Land near public transport, schools, hospitals, and employment hubs is worth more — because people want to live there. And guess who decides where that infrastructure goes? Governments.
A study by Infrastructure Australia found that proximity to major infrastructure (like metro stations) can add 10–20% to land value[5].
3. Amenity and Livability
Humans have always organised themselves around access to life essentials — food, water, shelter, work, and transport. These priorities haven’t changed in 5,000 years.
Governments know this, which is why masterplans often cluster housing around transport corridors, employment centres, and natural amenities.
As urban planner Brent Toderian puts it: “The best cities are built around people, not cars.”[6]
Governments Decide Where You Can Live
Most buyers don’t realise it, but your property’s value is largely determined by government decisions made years ago. These include:
- Zoning laws
- Density targets
- Infrastructure funding and rollout
- Urban growth boundaries
This is why property investors and developers pore over State-level strategic plans like the NSW Greater Sydney Region Plan, Victoria’s Plan Melbourne, or Queensland’s SEQ Regional Plan[7].
So Why Do Interest Rates Still Get the Headlines?
Because they move quickly and dramatically. Rate changes are headline-friendly. But they don’t change the fundamentals.
Between 2020 and 2023, Australia experienced rapid rate rises — yet property prices rebounded and continued to grow, especially in areas with strong infrastructure investment and population growth[8].
The Takeaway for Buyers
If you’re a property buyer — especially for investment — don’t just look at interest rates. Ask:
- Is this area slated for new transport or schools?
- Is the government rezoning this precinct?
- Is the population forecast to grow here?
- Is the land in short supply?
Final Word
Land value is the engine of property price growth. Interest rates are just the fuel injection. To buy smarter, invest with an eye toward land scarcity, infrastructure, and government planning. Because that’s where real property value is created.
References
- Reserve Bank of Australia. (2020). Housing and Mortgage Markets
- George, H. (1879). Progress and Poverty
- Gyourko, J., & Molloy, R. (2015). Regulation and Housing Supply
- NSW Department of Planning and Environment. (2022). Strategic Planning Framework
- Infrastructure Australia. (2021). Infrastructure Priority List
- Toderian, B. (2017). Human-Centered Urbanism
- Planning Victoria. (2023). Plan Melbourne 2017–2050
- CoreLogic. (2024). Monthly Housing Chart Pack
