How Will Interest Rate Cuts Impact The Property Market?

February 16th, 2024 - by Brad Gillespie

After two years of rising interest rates, many economists are now forecasting the RBA will begin cutting the official cash rate later this year.

This is likely to come as welcome relief to many homeowners and potential home buyers here in Sydney’s inner city and inner west.

But what does it mean for property prices? Will it send home values in our area even higher? We explore the likely impact of rate cuts on the property market in our local area.

When will rates begin to fall?

Between May 2022 and November 2023, the RBA raised the official cash rate from 0.1% to 4.35%.

The reason it did was that Australia, like much of the world, was suffering a period of post-COVID inflation. In fact, in December 2022, the annual rate of inflation peaked at 7.8% - its highest rate since 1987.

The RBA began raising the official cash rate to try to get this under control and back within its target range of 2-3%.

The good news is that the most recent figures show inflation coming down. In December 2023, the inflation rate stood at 4.1% for the year and just 0.6% for the quarter.

As a result, many economists now forecast that interest rates will begin coming down soon. Even the RBA itself hinted that it could begin reducing rates in mid-2024, so that the official cash rate stood at 3.2% by 2026.

The impact of lower interest rates

When interest rates come down, so too does the cost of borrowing - at least for those on, or looking to take out - variable interest rate home loans. This generally means two things.

First, people can meet their mortgage repayments more easily, and can therefore often afford a larger mortgage. Second, the banks are generally inclined to offer to lend more money too, so people’s borrowing capacities also go up.

Both of these factors means that people have more money to spend on a home, and this of itself can drive prices higher. Conversely, when interest rates rise, they have less to spend and house prices come down.

What has happened over the past year?

While that might be the theory, over the past year in the inner city and inner west, we’ve seen dwelling prices rising, even as interest rates also rose. In fact, some suburbs saw incredible price growth in house values over 2023, including Erskineville (11.1%) and Beaconsfield (35.8%).

That’s largely because interest rates aren’t the only factor at play in the property market. Instead, property prices are always set by the laws of supply and demand.

Other influences, such as the health of the economy, the level of unemployment, the strength of the rental market and population growth, can also create demand. Meanwhile, supply comes down to the number of homes on the market for sale.

Over the past few years we’ve seen low stock levels - that is fewer than usual properties available for sale. When these combined with a surging population over 2023 (Australia took in 518,000 new residents in the year to June 2023, 175,000 of whom settled in NSW), we saw a real imbalance between supply and demand, forcing prices upwards even as interest rates rose.

What comes next with falling interest rates

Logic says that when the RBA begins cutting rates, we’re likely to see prices rise further. That’s the likely outcome, but it’s not the only possible scenario.

If unemployment rises further (it has grown from 3.5% to 3.9% Australia-wide since 2022), or if the cost of living pressures bite further, these may counter the impact of interest rate cuts.

That said, most economists believe that these factors won’t dampen the impact of interest rate cuts, especially in light of an ongoing housing shortage.

In fact, some believe the effect of interest rate cuts could lead to a 10% jump in house prices over the next 12 months. Others believe growth will be closer to 5%, while others think that the cuts will be just enough to stop the market from falling in the face of softer economic conditions.

Timing the market

The reality is that while interest rate cuts can lead to house price growth, no one can say with certainty what the future holds and what factors will be at play.

For that reason, our advice is always to buy and sell the property at a time that suits you and your circumstances, rather than trying to ‘time the market’ for the best deal.

After all, as history shows, the long-term trajectory for quality inner city and inner west property always tends to be upwards.

Want more?

Contact our team today to find out more about how we can help you buy and sell in Sydney’s inner city and inner west.