The recent decision by the Reserve Bank of Australia (RBA) to cut interest rates has sparked a flurry of commentary among economic experts and property analystsMost agree that this move is likely to provide some support to the two major housing markets in Australia — Sydney and MelbourneHowever, the consensus leaning towards the idea that a significant rise in house prices as a result of this decision is largely improbable.

Paul Bloxham, chief economist at HSBC, offered an insightful analysis regarding the RBA’s strategyHe characterized the interest rate cut as a hawkish move, one that, while injecting liquidity into the market, is approached with caution regarding future policy directionsThis adjustment is expected to play a positive role in stabilizing housing prices in Sydney and MelbourneHistorically, these markets have been on a downward trajectory, with Sydney experiencing a four-month streak of price declines and Melbourne seeing a full ten months of decreasesSince peaking in September of the previous year, Sydney's prices have dipped by 1.7%, while Melbourne has faced a staggering drop of 7% since March 2022. Bloxham clearly stated, “Whether it’s the rate cuts that have already taken place, or the RBA’s future guidance, they are unlikely to lead to major surges in house prices.” He elaborated, indicating that the probability of substantial increases in prices is low in the near future, with a stable real estate market being the primary desirable outcome rather than drastic price jumps

Advertisements

Factors such as the current economic growth rate, employment conditions, and income levels of Australian households collectively contribute to this stability, suggesting that fluctuations in housing prices are unlikely to be significant.

Tim Lawless from CoreLogic offered a detailed examination from the perspective of market sentiment and consumer psychologyHe pointed out that short-term, the announcement of the rate cut will surely boost market sentimentHistorical data reflects a strong correlation between consumer confidence and real estate market activitiesAs interest rates fall, the outgoings on home loans decrease significantly, directly lowering the costs associated with purchasing a property, which in turn can enhance buyer intentHe anticipates an influx of buyers returning to the property market. “The most obvious effect of the rate cut is the uplift in market sentiment,” he emphasized. “However, due to pressing affordability challenges in housing, many consumers will continue to feel considerable pressure when trying to purchase propertyCompounded by high construction costs and land supply limitations, it’s unlikely to spark substantial price growth in the initial phase.” For instance, following the rate cut, the average floating mortgage rate has fallen to 6.07%; if banks pass the entirety of this cut onto borrowers, someone financing a home at $750,000 would see their monthly payments decrease by about $121. CoreLogic estimates that lower rates can enhance borrowing capacity by approximately $13,000 for the average buyerEven with these minor reliefs, the threshold for home purchase remains daunting for numerous individuals.

Nicola Powell from Domain contributed unique perspectives on market supply and demandShe highlighted that the anticipation of the rate cut had already significantly increased inquiry rates from buyers prior to the effective decision. "The inquiries from buyers across all capital cities surged by 13%, which indicates that people are gearing up to re-enter the property market," she noted

Advertisements

Reflecting on the period from late 2023 to September of the previous year, where buyer inquiries had dropped, this recent surge is a buoyant signal for the marketData from CoreLogic corroborated this trend, revealing that over the last two weeks, clearance rates for property auctions had risen dramatically, with more than 70% of properties successfully sold at auction, marking the highest level in over five monthsHowever, Powell cautioned that for housing prices to accurately reflect revitalized market activity, it will require time. “Affordability issues remain concerning, and there is considerable inventory in both Sydney and Melbourne.” She concluded, “Only when this surplus housing supply begins to be absorbed, leading to conditions of excess demand, will we witness price increases.” In some sought-after areas of Sydney and Melbourne, despite improved inquiry rates and auction clearance rates, the influx of new listings suggests that prices will likely remain stable in the short term.

The RBA’s decision to reduce interest rates signals positive prospects for the real estate market in Sydney and Melbourne, contributing to the stabilization of property prices and invigorating market activityNonetheless, due to the challenges of housing affordability, coupled with the abundance of market supply, the possibility of sharply rising prices in the immediate future appears limitedMoving forward, the evolution of Australia’s real estate market will continue to be influenced by a variety of factors including economic conditions, monetary policies, supply and demand dynamics, and land development regulationsThis landscape remains filled with uncertaintiesFor homebuyers, investors, and real estate professionals alike, keeping close tabs on market developments is essential for making well-informed and sensible decisions.