Economists predict there is an 80 percent chance the Reserve Bank will cut the official cash rate by 25 basis points when they meet later this month, bringing the official rate to 4.15 percent. Already, banks have moved to reduce interest rates paid on term deposits, a clear predictor of falling rates over time. Mortgage holders (about a third of Australia’s property occupants) and the federal government will welcome a cut given cost of living pressures remain the primary concern amongst the voting public.
However, will it be different this time?
History tells us that property markets benefit from falling interest rates for the obvious reason more buyers are able to participate in the market given improvements in affordability. This is, of course, partially offset by increased buyer competition in the market, as demand pushes up property values. The ‘emergency’ rate settings of early 2020 during peak COVID which had the official rate fall to 0.1 percent, buyer activity surged with many fixing rates at around 2 percent. The resultant competition in the market pushed up local property values with Perth’s median house price rising from $480,000 in 2020 to $750,000 today.
Interest rate increases in recent years have been used to tame rampant inflation and – whilst unfairly targeting mortgage holders – it has worked with core inflation falling to within the Reserve Bank’s 2-3 percent target band last month. The Bank will be nervous about re-kindling consumer spending by cutting rates too much, but with the big property markets of Sydney and Melbourne falling away, a graduated easing of rates will help underpin these core markets.
Data gurus Core Logic have done some great work on assessing Australia’s varied property markets and how they respond when interest rates fall. They have found that based on previous periods of rate reductions, national dwelling values increase by 6.1 percent for every one percentage point decline in interest rates. Higher priced markets, where loans are larger, tend to respond the strongest to rate cuts. It follows that Sydney and Melbourne look set to see more positive responses to an interest rate cut.
For Perth, the research shows our markets have less direct response to rate cuts than other markets in Australia. I found this surprising although it made more sense when considered comparably to the impacts of mining sector related boom and bust cycles. And our market has continued strong value gains despite the recent rapid rises in interest rates, highlighting the limited relationship between values and rates.
However, will it be different this time? In short, yes. Perth’s median home values remain low comparative to other cities and housing affordability (both buying and renting) measured by the Real Estate Institute of Australia puts Perth at the top of the capital cities aside from Darwin. A rate cut will encourage investors into the market and Buyer Agency, Verve have reported a surge in buyer enquiry from east coast owner-occupiers and investors, predicting Perth prices will move
again once rates come down. REIWA has predicted 10 percent growth for 2025 seeing our median house price reach $825,000 this time next year – which might prove a conservative estimate.
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