Recent data has shown that Australian home price growth is slowing as more homes are listed on the market, and affordability constraints from high interest rates limit the number of potential home loan borrowers.
CoreLogic’s latest Home Value Index release and PropTrack’s most recent Home Price index both found values increased nationally in September 2024, although growth is slowing.
CoreLogic says that while the median Australian home value has risen 6.7% over the past year to a new high of $807,110, the cumulative 1.0% in the last three months was the lowest rise seen over a rolling three-month period since March 2023.
PropTrack says its measure of national home prices recorded a small 0.04% uptick in September to see 5.67% price growth over the last 12 months.
“The number of homes listed for sale has lifted, providing more choice and slowing price growth,” says PropTrack Senior Economist Eleanor Creagh.
However, many analysts believe that expected cuts in interest rates over the next few months, coupled with improved borrowing capacity for some buyers, could see more competition return to the market, accelerating home price growth again.
SQM Research Managing Director Louis Christopher recently told the Australian Financial Review that “we are quite confident the market will bounce once we see the first interest rate cut.”
While the Reserve Bank of Australia has warned Australians not to expect interest rate cuts in the near term, with Australian and global inflation falling, financial markets have fully priced in 4 interest rate cuts of 0.25% each (a total of 1%) over the next year.
So, how much would home prices lift if rates were cut?
“There are many ways to calculate the impact, and it is difficult to tease out what is the impact of a cut and what is the impact of other factors such as the lending environment, population growth, state-based economic growth and construction costs,” says Ray White’s Chief Economist Nerida Conisbee.
So Ms Conisbee and her team took a very simple approach to try to answer the question.
They looked at what the impact of previous rate cuts had been on the Australian real estate market.
Limiting their study to houses in the major capital cities, the Ray White team examined house prices a month after the RBA first cut interest rates in previous easing cycles.
“We have limited it to cuts that occur after at least six months of no movement,” Nerida Conisbee says.
“There have been four instances since January 2011 that this occurs - November 2011, February 2015, May 2016 and June 2019.”
Nerida Conisbee says the results “are not surprising.”
“Since January 2011, the city that has had the biggest jump following a rate cut has been Sydney, followed by Melbourne, then Canberra.
“All these cities are the most expensive in Australia, and therefore, it makes sense that they would be more sensitive to the cost of borrowing,” she says
“Perth and Darwin saw no increase, reflecting relatively stagnant markets during this time but also their lower sensitivity to interest rate changes.”
Ms Conisbee says this could change, as “Perth and Brisbane are currently our strongest markets and, although less sensitive to interest rates, are likely to get a further boost following a rate cut.
“Sydney and Melbourne are comparatively weak, having seen falls in pricing in some months this year.
“It is likely that conditions will turn around somewhat once rates are cut.”
Sydney stands out
Based on the latest CoreLogic figures, the median Australian house would increase in value from $873,116 to $878,355 - a difference of $5,239 - a month after a single 0.25% rate cut.
However, the Ray White analysis shows a much greater lift is likely to come in Sydney, as the city’s existing higher prices and, therefore, mortgagee debt levels make it more sensitive to interest rate movements than any other city.
Based on CoreLogic figures again, that would see Sydney’s median house value jump from $1,473,775 to $1,494,408 - a $20,633 gain.
“A rate cut will reverse Sydney’s situation,” Nerida Conisbee says.
A large part of the uplift will come from greater buyer confidence.
“If most people are expecting four cuts next year, that will change the sentiment to be far more positive,” Ms Conisbee says, pointing out that the suburbs most likely to benefit from a rate cut were those well above the city-wide house median, with high numbers of family homes.
Ray White Economics provided Sydney’s Daily Telegraph newspaper with this list of suburbs that could get an immediate uplift after a single 0.25% rate cut, showing the expected percentage and price gains based on the suburb’s existing median house price:
Interestingly, many of the Sydney suburbs that are expected to see the greatest lift are on the city’s expensive Northern Beaches, where prices have tended to ease over the last year because of affordability constraints.
Side effects
Ray White’s Nerida Conisbee admits the expected lift in house prices after an interest rate cut could be bad news for first-home buyers.
Although their borrowing power would get a boost with lower interest rates, she says first home buyers will be faced with “a fast-moving market” that “could be challenging”, not to mention the fact that they will need to save a bigger deposit.
On the other hand, Ms Conisbee says a rate cut could help “stabilise” the rental market.
She points out that many landlords have had to raise rents over the past two and a half years to service higher investment loan mortgage costs as interest rates have spiralled higher.
“If that cost goes down, it won’t be so hard to pay a loan, and you might not be so motivated to raise rents,” Ms Conisbee told the Daily Telegraph.