When interest rates fall, the ripple effects across our local property market can be both swift and significant, putting further upward pressure on property values and impacting affordability.
When the RBA met earlier this month and lowered the cash rate to 3.60%, making it the third rate cut of the year and the lowest level since March 2023, buyers responded with notable increases in buyer activity especially in the sub $800,000 range. The cut has made money cheaper with the average variable interest rate for owner-occupiers at around 5.5% and 3-year fixed rates dipping below 4% – ‘lower for longer’ anyone?
The lower rates have reduced a $600,000 loan’s monthly mortgage cost by about $95 and borrowing capacity has now improved for those on the cusp of affording their first home. Meanwhile, first-home buyers across WA are preparing for changes to the Home Loan Deposit Guarantee Scheme in January that will improve access to the scheme. The inevitable rise in demand as a result in a lower interest rate environment translates to heightened sales activity and more demand. With supply still unable to meet that demand, prices must rise.
Although falling interest rates usually result in rising values, the immediate effect is financial relief. With Perth’s median house prices still lower than those of the east coast cities, more manageable repayments enhance accessibility, making WA a magnet for interstate and international newcomers.
Investors are particularly sensitive to changes in interest rates. Lower borrowing costs improve rental yields, increasing the appeal of property compared to other investments. Perth’s low vacancy rates, thanks to undersupply, continues to entice investors who continue to speculate that Perth’s recent property market gains are not done yet.
Cheaper borrowing costs also benefits builders and developers by lowering funding costs. Hopefully, that will encourage more housing projects including land, off-plan apartment stock and townhomes adding much needed supply.
Former Prime Minister, John Howard when asked about deteriorating housing affordability replied, “No one ever stops me in the street to complain that their home value has increased”. Indeed, as property values rise and mortgage costs ease, homeowners feel more financially secure, and this confidence spills over into domestic spending boosting retail, hospitality, and services and lifting local economies.
Lower interest rates offer welcome relief to those looking to buy for the first time or for those already balancing the cost burdens of a mortgage and everyday living expenses. However, given the momentum of the local market, lower rates will give rise to more rapid price growth until affordability constraint and added supply cool this hot market.
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